<PAGE>
As filed with the Securities and Exchange Commission on March 31, 1998.
Registration No. 333-45863
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
The Havana Group, Inc.
(Name of small business issuer in its charter)
<TABLE>
<CAPTION>
DELAWARE 5999 34-1454529
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
organization) Classification Code No.)
</TABLE>
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(330) 492-8290/facsimile
(Address and telephone number of principal executive offices and
principal place of business.)
William L. Miller, Chief Executive Officer
The Havana Group, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
(330) 492-8090
(330) 492-8290/facsimile
(Name, address and telephone number of agent for service)
Copies to:
<TABLE>
<S> <C>
Steven Morse, Esq. Steven Gold, Esq.
Lester Morse P.C. Mintz & Gold, LLP
Suite 420 444 Park Ave. South
111 Great Neck Road New York, NY 10016
Great Neck, NY 11021 Phone: (212) 696-4848
Phone: (516) 487-1446 Fax: (212) 696-1231
Fax: (516) 487-1452
</TABLE>
Approximate date of commencement of proposed sale to public:
As soon as practicable after the effective date of this Registration Statement.
<PAGE>
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis, pursuant to Rule 415 under the Securities Act of
1933, check the following box: [x]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
ii
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH AMOUNT OFFERING AGGREGATE AMOUNT OF
CLASS OF SECURITIES TO BE PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT PRICE (1) FEE
- ----------------------------------------------------- ---------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
Units, each consisting of one share of Common Stock,
$.001 par value per share, and two Class A Warrants
each to purchase one share of Common Stock (2)..... 529,000 $ 6.00 $ 3,174,000 $ 936.33
Shares of Common Stock included in the Units......... 529,000 -- -- -(4)
Class A Warrants included in the Units............... 058,000 -- -- -(4)
Shares of Common Stock underlying Class A Warrants
(3)................................................ 1,058,000 $ 5.25 $ 5,554,500 1,638.57
Underwriters' Warrant Purchase Option ("Underwriters'
Option")........................................... 46,000 $ .001 $ 46 .01
Units to purchase one share of Common Stock and two
Class A Warrants each to purchase one share of
Common Stock in Underwriters' Option to be
purchased from a Selling Unit Holder............... 46,000 $ 9.00 $ 414,000 122.13
Class A Warrants to purchase one share of Common
Stock in Underwriters' Option...................... 92,000 -- -- -(4)
Shares of Common Stock included in Underwriters'
Option (4)......................................... 46,000 -- -- -(4)
Shares of Common Stock underlying Class A Warrants
included in the Underwriters' Option (5)........... 92,000 $ 7,875 $ 724,500 213.74
Common Stock of Selling Security Holders............. 400,000 $ 6.00 $ 2,400,000 708.00
Class A Warrants of Selling Security Holders......... 1,600,000 -- -- -(4)
Shares of Common Stock underlying Class A Warrants of
Selling Security Holders........................... 1,600,000 $ 5.25 $ 8,400,000 2,478
Total Registration Fee(6)............................ $6,096.78
-----------
-----------
</TABLE>
- ------------------------
(1) Estimated solely for purposes of determining the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
(2) Includes 69,000 Units which the Underwriters have the option to purchase
from a Selling Unit Holder to cover Over-Allotments, if any.
(3) Issuable upon the exercise of Class A Warrants to be offered to the public.
(4) No fee is required under Rule 457(g).
(5) Issuable upon the exercise of the Class A Warrants included in the 46,000
Units included in the Underwriters' Option.
(6) $6,096.78 previously paid
iii
<PAGE>
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement covers the primary offering of securities of
The Havana Group, Inc. (the "Company") and up to 69,000 Units to be sold by
Duncan Hill, Inc. ("Selling Unit Holder") pursuant to the Underwriters'
Over-Allotment Option and the offering of other securities by certain
persons, each as a selling security holder (the "Selling Security Holders").
The Company is registering, under the primary prospectus (the "Primary
Prospectus"), 529,000 Units, each Unit consisting of one share of Common
Stock and two Class A Warrants. The Company is registering on behalf of a
bridge lender as a Selling Security Holder under an alternate prospectus (the
"Alternate Prospectus"), the resale of 400,000 shares of Common Stock and
1,400,000 Class A Warrants issuable by the Company to the Selling Security
Holder upon the completion of the Offering pursuant to a Convertible Note
which provides for the automatic conversion of the Convertible Note and the
exercise of such 1,400,000 Class A Warrants by the transferees of the bridge
lender. The Alternate Prospectus also covers the resale of 200,000 Class A
Warrants owned by William Miller, the Company's Chief Executive Officer, and
the exercise of the 200,000 Class A Warrants by the transferees of Mr.
Miller. The 200,000 Class A Warrants are issuable by the Company pursuant to
Warrants which provide for the automatic conversion of the Warrants into
Class A Warrants upon the completion of the Offering. In the event that the
Underwriters' Over-Allotment Option is not exercised in full, the Alternate
Prospectus will also cover the resale of any unsold Units up to 69,000 Units
and the issuance of such shares of Common Stock underlying the exercise of
the Class A Warrants included in the Units. The Alternate Prospectus pages
which follow the Primary Prospectus, contain certain sections which are to be
combined with all of the sections contained in the Primary Prospectus, with
the following exceptions; the front cover page and the pages which precede
"Available Information," the back cover page and the sections entitled
"Underwriting" and "Selling Security Holders." In addition, the section
entitled "Concurrent Sales" and "Plan of Distribution" from the Alternate
Prospectus pages will be added to the Alternate Prospectus. The section
entitled "Use of Proceeds" in the primary Prospectus will be changed to read
"Use of Proceeds of Company Offering." Furthermore, all references contained
in the Alternate Prospectus to "the Offering" shall refer to the Company's
offering under the Primary Prospectus and all references to the "Concurrent
Offering" shall refer to the Selling Security Holders Offering in the
Alternate Prospectus.
iv
<PAGE>
THE HAVANA GROUP, INC.
Cross-Reference Sheet
Showing Location in Prospectus of
Information Required by Items in Part I of Form SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
------------------------------------------- -------------------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside Outside Front Cover of Prospectus
Front Cover Page of Prospectus
2. Inside Front and Outside Bank Cover Pages Inside Front and Outside Bank Cover Pages
of Prospectus of Prospectus; Additional Information
3. Summary Information and Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page of Prospectus;
Underwriting
6. Dilution Dilution
7. Selling Security holders Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of Prospectus;
Selling Security Holders; Underwriting
9. Legal Proceedings Business--Legal Proceedings
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Principal and Selling Stockholders
Owners and Management
12. Description of Securities Description of Securities; Dividends
13. Interest of Named Experts and Counsel Experts and Legal Matters
14. Disclosure of Commission Position on Underwriting
Indemnification for Securities Act
Liabilities
15. Organization Within Last Five Years The Company and its Parent
16. Description of Business Prospectus Summary; The Company and its
Parent; Business
17. Management's Discussion and Analysis or Management's Discussion and Analysis of
Plan of Operation Financial Condition and Results of
Operations
18. Description of Property Business
18. Certain Relationships and Related Certain Transactions
Transactions
19. Market for Common Equity and Related Risk Factors; Unregistered Shares Eligible
Stockholder Matters for Immediate and Future Sale; Description
of Securities
21. Executive Compensation Management--Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure Not Applicable
</TABLE>
v
<PAGE>
PRELIMINARY PROSPECTUS DATED MARCH 31, 1998
PROSPECTUS
THE HAVANA GROUP, INC.
460,000 Units
Each Unit Consisting of One Share of Common Stock
and Two Class A Common Stock Purchase Warrants
The Havana Group, Inc. (the "Company") is offering for sale 460,000 units
(the "Units"), each Unit consisting of one share of common stock, $.001 par
value (the "Common Stock") and two redeemable Class A Common Stock Purchase
Warrants (the "Class A Warrants") (the "Offering"). The Common Stock and the
Class A Warrants are not detachable or separately transferable until the
earlier of (i) __________, 1998 (six months from the date of this Prospectus)
or (ii) the date selected by the Representative (as defined herein) in
writing for separation (the "Separation Date"). After the Separation Date,
the Common Stock and Class A Warrants will be detachable and may trade
separately. Each Class A Warrant entitles the holder to purchase one share of
Common Stock at a price of $5.25 and are exercisable from the Separation Date
until five years after the date of this Prospectus. The Company may redeem
the Class A Warrants at a price of $.10 per Warrant, at any time after one
year from the date of this Prospectus, upon not less than 30 days' prior
written notice, if the closing bid price of the Common Stock has been at
least $10.50 per share for 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given. See
"Description of Securities."
(Continued on page 3)
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE ___
AND "DILUTION" BEGINNING ON PAGE ___.
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE DISCOUNTS PROCEEDS TO SELLING
TO AND TO UNIT
PUBLIC COMMISSIONS(1) COMPANY (2) HOLDER
------------ --------------- ------------ -----------
<S> <C> <C> <C> <C>
Per Unit.......................... $ 6.00 $ 0.60 $ 5.40 $ 5.40
Total (3)......................... $ 2,760,000 $ 276,000 $2,484,000 $ -0-
</TABLE>
- ------------------------
(1) Does not include additional compensation to be received by the Underwriters
in the form of a non-accountable expense allowance equal to 3% of the public
offering price of the Units, the value of an option granted to the
Underwriters to purchase up to 46,000 Units at an exercise price of $9.00
per Unit ("Underwriters' Unit Purchase Option"), or a two-year financial
consulting agreement with the Representative at a cost to the Company of
$100,000 payable in advance at the Closing of the Offering. The Company has
also agreed to indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at approximately $434,000, including the non-accountable expense allowance
in the amount of $82,800 ($95,220 if the Underwriters' Over-Allotment option
is exercised in full), and the financial consulting fee referred to above.
After deducting such expenses, the net proceeds to the Company will be
approximately $2,050,000 (approximately $2,037,500 if the Underwriters'
Over-Allotment Option is exercised in full). See "Use of Proceeds."
(3) Duncan Hill Inc., the Company's sole stockholder (the "Selling Unit
Holder") has granted the Underwriters an option, exercisable within 30 days
from the date of this Prospectus, to purchase up to 69,000 additional Units,
solely to cover Over-Allotments, if any (the "Over-Allotment Option"). If
such Over-Allotment Option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Unit Holder will be approximately $3,174,000 and $317,400,
$2,484,000, and $372,600, respectively. See "Use of Proceeds" and
"Underwriting."
THIS LEGEND IN RED ON COVER PAGE
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
VTR CAPITAL, INC.
The date of this Prospectus is April , 1998.
--
2
<PAGE>
INSERT COLOR PHOTOS
3
<PAGE>
The Registration Statement of which this Prospectus forms a part also
includes an Alternate Prospectus that covers a "Concurrent Offering" by
certain Selling Security Holders (as defined below). The Concurrent Offering
includes an offering of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants owned by a bridge lender (the "Bridge Lender") and the exercise of
the Common Stock underlying the 1,400,000 Class A Warrants by the transferees
of the bridge lender. The Alternate Prospectus also covers the resale of
200,000 Class A Warrants owned by William L. Miller ("Miller"), the Company's
Chief Executive Officer and the exercise of such 200,000 Class A Warrants by
the transferees of Mr. Miller. In addition to the foregoing, the Alternate
Prospectus includes up to 69,000 Units (identical to those sold in the
Offering) to be offered by Duncan Hill Inc., the Company's sole stockholder
(the "Selling Unit Holder" or "Duncan Hill") prior to the Offering and the
exercise of the Common Stock underlying the 138,000 Class A Warrants by the
transferees of the Selling Unit Holder. To the extent that the Underwriters
exercise the Over-Allotment Option as described herein, then the number of
Units to be offered by the Selling Unit Holder in the Concurrent Offering
will be proportionately reduced. (The Bridge Lender, Miller, and the Selling
Unit Holder are hereinafter collectively referred to as the "Selling Security
Holders.") The securities offered as part of the Concurrent Offering may be
sold concurrently with or after the Offering. The Class A Warrants held by
the Selling Security Holders are identical to the Class A Warrants being
offered by the Company. Sales of such securities or even the potential of
such sales at any time may have an adverse effect on the market prices of the
securities offered hereby. See "Certain Transactions," "Selling Security
Holders" and "Risk Factors--Potential Acverse Effect of Redemption or
Exercise of Class A Warrants."
Prior to the Offering, there has been no public market for the Units and
there can be no assurance that any such market will develop. VTR Capital,
Inc. will act as the representative of the Underwriters named herein (the
"Representative"). For information regarding the factors considered in
determining the initial public offering price of the Units and the exercise
price of the Warrants, see "Underwriting." The Units, Common Stock and
Warrants are expected to be approved for quotation on the Over-the-Counter
("OTC") Electronic Bulletin Board under the symbols "_______," "_______," and
"_______," respectively. See "Risk Factors - Certain Implications of Trading
Over-The-Counter; "Penny Stock Regulations." There is no assurance, however,
that the Company's securities will be approved for listing on the OTC
Electronic Bulletin Board or elsewhere. The Company anticipates that the
Units offered hereby will be qualified for sale by the Company in a limited
number of states. See "Risk Factors--Limits on Secondary Trading; Current
Prospectus and State Blue Sky Registration Required to Exercise Class A
Warrants."
Upon completion of the Offering, the Selling Unit Holder and Miller will
beneficially own approximately 89% of the Company's outstanding voting capital
stock (not including Class A Warrants and options to be owned by them). See
"Risk Factors - Control by Duncan Hill and Miller."
The Units being offered for sale by the Company are being offered on a
"firm commitment" basis, subject to prior sale, when, as and if delivered to
and accepted by the Underwriters. The Underwriters reserve the right to
reject any order in whole or in part. It is expected that delivery of
certificates representing the
4
<PAGE>
Units will be made against payment therefor on or about April ___, 1998 at
the office of the Representative at 17 Battery Place, New York, New York
10004.
A SIGNIFICANT AMOUNT OF THE UNITS TO BE SOLD IN THE OFFERING MAY BE SOLD TO
CUSTOMERS OF THE UNDERWRITERS. SUCH CUSTOMERS SUBSEQUENTLY MAY ENGAGE IN
TRANSACTIONS FOR THE SALE OR PURCHASE OF THE UNITS AND/OR THE SECURITIES
INCLUDED THEREIN WITH OR THROUGH THE UNDERWRITERS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE UNITS, COMMON
STOCK AND/OR CLASS A WARRANTS, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
5
<PAGE>
AVAILABLE INFORMATION
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and in accordance therewith will file reports and other
information with the Securities and Exchange Commission (the "Commission").
Reports and other information filed by the Company can be inspected and copied
(at prescribed rates) at the Commission's Public Reference section, 450 Fifth
Street, NW, Washington, D.C. 20549, as well as the New York Regional Office,
Seven World Trade Center, New York, NY. The Commission maintains a Web site on
the Internet (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding issuers that file electronically with
the commission through the Electronic Data Gathering, Analysis, and Retrieval
System (EDGAR).
The Company has filed with the Commission a registration statement on
Form SB-2, File No. 333-45863 (herein together with all amendments and
exhibits referred to as the "Registration Statement") under the Securities
Act of 1933, as amended (the "Securities Act"), of which this Prospectus
forms a part. This Prospectus does not contain all of the information set
forth in the registration Statement, certain parts of which have been omitted
in accordance with the rules and regulations of the Commission. For further
information, reference is made to the Registration Statement. Statements
contained in this Prospectus regarding the contents of any contract or other
document referred to herein or therein are not necessarily complete, and in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document, each such statement being qualified by such reference.
6
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and the
Financial Statements (including the notes thereto) appearing elsewhere in this
Prospectus. In addition, unless otherwise indicated to the contrary, all
information appearing herein does not give effect to the exercise of (i) the
Over-Allotment Option; (ii) the Class A Warrants (including Class A Warrants
included in the Over-Allotment Option and those owned by the Selling Security
Holders); or (iii) the Underwriters' Unit Purchase Option. All share and per
share amounts in this Prospectus give retroactive effect to a 10,000 for 1
forward stock split effective December 8, 1997. See "Description of Securities,
"Bridge Financing," and "Underwriting." Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
The Havana Group, Inc. (the "Company") is a Delaware corporation engaged
in the business of (i) operating a retail smokeshop in Canton, Ohio which
primarily sells pipes, cigars and smoking accessories; (ii) marketing pipes,
tobaccos and related accessories directly to consumers through its 48 page
full color catalog (the "Carey Smokeshop Catalog"); and (iii) providing a
program of automatic periodic shipments of tobacco directly to consumers (the
"Carey Tobacco Club"). The Company intends to create and develop a Cigar
Club (the "Havana Group Direct") pursuant to which the Company will charge
certain membership fees and offer certain cigar purchasing, warehousing and
shipping services in return for membership, purchasing and shipping fees.
The Company does not sell cigarettes. See "Use of Proceeds."
The Company has one wholly-owned subsidiary, namely, Monarch Pipe
Company ("Monarch"). Monarch manufactures pipes which are exclusively sold by
the Company.
The Company's predecessor, E. A. Carey of Ohio, Inc., an Ohio
corporation, ("Carey"), formed the Company as a Delaware subsidiary on
November 26, 1997 and merged Carey into the Company for the purpose of its
reincorporation in Delaware, which merger was effective December 5, 1997.
Unless otherwise indicated, all references in this Prospectus to the Company
include the Company, Monarch and its predecessor, Carey.
The Company through Carey has been in business for over 40 years. Carey
was formed to sell the patented Carey "Magic Inch" smoking pipe exclusively
through mail order during the 1960's and 1970's. In 1984, Duncan Hill
purchased Carey. Since then, Carey (and now the Company) has operated as a
subsidiary under Duncan Hill's control.
7
<PAGE>
The Company had operated a smokeshop named "Carey's Smokeshop" from 1984
to 1996 to maintain a retail presence and provide the Company with a factory
outlet for its overstock products which had not been sold through the Carey
Smokeshop Catalog or the Carey Tobacco Club. In October 1996, the Company
closed its retail store, leased an off-mall retail location in Canton, Ohio,
and reopened as "The Havana Group" (hereinafter referred to as the
"Smokeshop") on December 8, 1997. The Smokeshop sells pipes, cigars and
smoking accessories and intends to sell other product lines, including fine
wines and imported beers. The Company has applied for a license to sell such
liquor products and is currently waiting to receive such license. The Company
may expand the number of retail stores depending upon the success of its
existing store and available external financing, if any.
Currently, the Company derives its revenues from three sources; retail sales
from the Smokeshop, direct mail of catalogs and from the operation of its Carey
Tobacco Club. During the year ended December 31, 1997, the Company
mailed 389,540 catalogs and generated sales of $1,097,670, approximately 74% of
total gross revenue. Carey Tobacco Club, a monthly program of tobacco shipments
that supplies pipe tobacco to individual Club members, generated $368,009 in
gross sales, approximately 25% of total gross revenue. The Smokeshop was
recently opened on December 8, 1997, and generated sales of $8,781 for the 23
day period of December 8 through December 31, 1997.
Related Parties.
The Company is a subsidiary of Duncan Hill. a publicly
held corporation which also controls a majority interest in Kids Stuff, Inc.
("Kids Stuff"), which is traded on the OTC Electronic Bulletin Board under the
symbol "KDST." Since January 1, 1997, the telemarketing, order fulfillment,
warehousing, data processing and administrative functions of the Company have
been provided by Kids Stuff. The Company has recently executed an agreement with
Kids Stuff for Kids Stuff to continue to provide such services on a fee basis.
See "The Company and its Parent" and "Certain Transactions."
The executive offices of the Company are located at 4450 Belden Village
Street, N.W., Suite 406, Canton, Ohio 44718, and the Company's telephone number
is (330) 492-8090.
ORGANIZATION CHART (Before Offering)
[GRAPHIC]
68%
100%
100%
8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered by the Company......... 460,000 Units, each Unit consisting of one share
of Common Stock and two Class A Warrants. The
Common Stock and Class A Warrants are not
detachable or separately transferable until the
earlier of (i)______, 1998 (six months from the
date of this Prospectus) or (ii) the date selected
by the Representative in writing for separation
(the "Separation Date"). After the Separation
Date, the Common Stock and Class A Warrants will
be detachable and may trade separately. Each Class
A Warrant entitles the holder to purchase one
share of Common Stock at an exercise price of
$5.25 and is exercisable from the Separation Date
until five years after the date of this
Prospectus. The Company may redeem the Warrants at
a price of $.10 per Class A Warrant at any time
after they become exercisable upon not less than
30 days' prior written notice if the closing bid
price of the Common Stock has been at least $10.50
per share for the 20 consecutive trading days
ending on the 15th day prior to the date on which
the notice of redemption is given. See
"Description of Securities."
Securities Offered by Sole
Stockholder of the Company............... 69,000 Units. In the event that the Over-Allotment
Option is exercised in whole or in part, these
Units will be purchased by the Underwriters from
the Selling Unit Holder. See "Principal and
Selling Stockholder" and "Certain Transactions."
Concurrent Offering by Selling Security
Holders.................................. The Registration Statement of which this Prospectus
forms a part also includes an Alternate Prospectus
that covers a "Concurrent Offering" by certain
Selling Security Holders (as defined below). The
Concurrent Offering includes an offering of
400,000 shares of Common Stock and 1,400,000 Class A
Warrants owned by the Bridge Lender and the exercise
of the Common Stock underlying the 1,400,000 Class A
Warrants by the transferees of the Bridge Lender. The
Alternate Prospectus also covers the resale of 200,000
Class A Warrants owned by Miller and the exercise of
such 200,000 Class A Warrants by the transferees
of Mr. Miller. In addition to the foregoing, the
Alternate Prospectus includes the resale of up to 69,000
Units (identical to those sold in the Offering) to be
offered by Duncan Hill and the exercise of the Common
Stock underlying the 138,000 Class A Warrants by
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
the transferees of Duncan Hill. See "Principal and
Selling Stockholders." To the extent that the Underwriters
exercise the Over-Allotment Option as described herein, then
the number of Units to be offered by Duncan Hill in the
Concurrent Offering will be proportionately reduced. (The Bridge
Lender, Miller, and Duncan Hill are hereinafter collectively
referred to as the "Selling Security Holders.") The securities
offered as part of the Concurrent Offering may be sold at any time
after the date of this Prospectus. The Class A Warrants held by the
Selling Security Holders are identical to the Class A Warrants
being offered by the Company. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the
market prices of the securities offered hereby. See "Certain
Transactions," and "Selling Security Holders" and "Risk Factors --
Potential Adverse Effect of Redemption or Exercise of Class A Warrants."
</TABLE>
<TABLE>
<CAPTION>
CAPITALIZATION
- --------------
<S> <C>
Common Stock Outstanding prior to the Offering (1)...... 1,000,000 Shares
Common Stock to be Outstanding after the Offering (2)... 1,860,000 Shares
Class A Warrants Outstanding before Offering (3)........ -0- Class A Warrants
Class A Warrants to be Outstanding after Offering (3)... 2,658,000 Class A Warrants
Series A Non-Convertible Preferred Stock (4)............ 5,000,000 Shares
Series B Convertible Preferred Stock (5)................ 1,100,000 Shares
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Proposed OTC Bulletin Board Symbols
Units
Common Stock
Warrants
Use of Proceeds............................ The Company intends to apply the net proceeds of the Offering primarily for the
purchase of inventory, humidor construction, the repayment of $102,000 in
principal and interest of a non-convertible note held by a Selling Security
Holder, the payment of the first year's Preferred Stock dividends of $110,000 to
Duncan Hill, Officers' Salary, Marketing and for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors............................... The Offering involves a high degree of risk and immediate and substantial
dilution. These risks include, without limitation, the following: Chief Executive
Officer will not be Required to Work Full Time; Dependence Upon Miller/Need for
Additional Management, Potential Conflicts of Interest; Lack of At Least Two
Independent Directors and Committees Thereof; Technological Changes in Control by
Duncan Hill and Miller; Company's History of Operating and Net Losses and
Uncertainty as to Future Operating Results; Company Guarantee of Kids Stuff
Line-of-Credit; Dependence Upon Kids Stuff, an affiliate of the Company;
Dependence on Offering Proceeds -- Payments to the Bridge Lender, Miller and
Duncan Hill; Possible Need for Additional Financing; Constraints on Ability to
Satisfy Demand for Premium Cigars; Positive Trends for Cigar Market May Not
Continue; Dependence Upon One Retail Smokeshop; Product Sourcing; Potential
Product Liability; Competition; Extensive and Increasing Regulation of Tobacco
Products; Tobacco Industry Litigation; State Sales Tax Collection; Social,
Political and Economic Risks Associated with International Trade; Technological
Changes in Distribution and Marketing Methods; Management's Broad Discretion in
the Application of Proceeds of the Offering; Patents Trade Names and Trademarks;
No Prior Public Market/Market Volatility; SEC investigation Involving the
Representative; NASD Complaint Against the Representative; Possible Adverse Effect
on Liquidity and Price of the Company's Securities Due to SEC Investigation and
NASD Complaint; Immediate and Substantial Dilution to Public Investors; and Recent
Sale of Securities. See "Risk Factors" and "Dilution."
</TABLE>
- ------------------------
(1) Does not include (i) options to purchase 260,000 shares of Common Stock
owned by certain directors of the Company; (ii) warrants to purchase
138,000 shares of Common Stock owned by the Selling Unit Holder and
Warrants to purchase 200,000 shares of Common Stock owned by Miller,
which warrants upon the completion of the Offering automatically convert
into Class A Warrants identical to the Class A Warrants sold in the
Offering; (iii) a convertible note owned by the Bridge Lender convertible
into a total of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants, such note automatically converts upon the completion of the
Offering; and (iv) up to 1,100,000 shares issuable upon conversion of the
Series B Preferred Stock (see Note 3).
(2) The 1,860,000 shares of Common Stock includes 400,000 shares of Common Stock
to be issued to a Bridge Lender automatically upon the completion of the
Offering pursuant to a convertible note. The 1,860,000 shares do not
include: (i) 920,000 shares of Common Stock issuable upon the exercise of
the Class A Warrants included in the Units offered hereby; (ii) options to
purchase up to 260,000 shares of Common Stock owned by certain directors of
11
<PAGE>
the Company; (iii) warrants to purchase 138,000 shares of Common Stock owned
by the Selling Unit Holder and warrants to purchase 200,000 shares of Common
Stock owned by Miller, which warrants upon the completion of the Offering
automatically convert into warrants identical to the Class A Warrants; (iv)
1,400,000 shares of Common Stock issuable upon the exercise of 1,400,000
Class A Warrants attributable to the Bridge Lender; (v) 1,100,000 shares
issuable upon conversion of the Series B Preferred Stock (see Note 5); and
(vi) 138,000 shares of Common Stock issuable upon exercise of the
Underwriters' Unit Purchase Option and underlying warrants.
(3) Prior to the Offering, the Company has no Class A Warrants outstanding.
However, it has outstanding warrants and a convertible note which upon the
completion of the Offering automatically convert into an aggregate of
1,738,000 Class A Warrants. Does not include 92,000 Warrants issuable
upon exercise of the Underwriters' Unit Purchase Option.
(4) The Selling Unit Holder, the Holder of the Series A Preferred Stock, has the
right to vote each share of Preferred Stock on the same basis as each share
of Common Stock. See "Description of Securities."
(5) The Selling Unit Holder, the Holder of the Series B Preferred Stock, has the
right to convert each share of Preferred Stock into one share of Common
Stock commencing any time after the Company has achieved pre-tax earnings of
at least $500,000 during any fiscal year.
12
<PAGE>
SUMMARY FINANCIAL DATA
The summary financial data is derived from the historical financial
statements of the Company. The adjusted financial statements of the Company
are derived from the historical financial statements of the Company and gives
effect to the completion of a $200,000 bridge financing in January 1998. The
pro forma financial statements are derived from the adjusted financial
statements and gives effect to the sale of 460,000 Units offered hereby and
the automatic conversion of a convertible note upon the completion of the
Offering into a total of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants. The financial statements of the Company for dates and periods prior
to December 5, 1997 are those of its predecessor, Carey. This summary
financial data should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" as well as the
Company's historical financial statements and the related notes thereto, and
the Company's pro forma financial statements and the related notes thereto,
included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operational Data:
Net Sales.............................................. $1,668,927 $1,656,316 $1,427,574
Net Loss............................................... (64,626) (115,523) (61,772)
Net Loss per common share.............................. $ (.06) $ (.12) $ (.06)
Weighted average number of shares outstanding during the
period (1)........................................... 1,000,000 1,000,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL (2) PRO FORMA (3)
------------ -------------- -------------
<S> <C> <C> <C>
Balance Sheet Data:
Total Assets...................................................... $1,240,228 $1,440,228 $3,388,181
Net Tangible Assets............................................... 404,451 504,451 2,552,404
Working Capital................................................... 335,747 435,747 2,483,700
Total Liabilities................................................. 317,115 417,115 317,115
Stockholder's Equity.............................................. 923,113 1,023,113 3,071,066
</TABLE>
- ------------------------
(1) Reflects the reincorporation and recapitalization of Carey in Delaware. See
"The Company and its Parent--Reorganization."
(2) Reflects the completion of $200,000 of bridge financing. See "Use of
Proceeds--Bridge Financing."
(3) Reflects the sale of 460,000 Units offered hereby, and the receipt of the
net proceeds and repayment of $102,000 of indebtedness including estimated
accrued interest.
13
<PAGE>
RISK FACTORS
An investment in the securities offered hereby is speculative and involve
a high degree of risk and substantial dilution and should only be purchased
by investors who can afford to lose their entire investment. Each prospective
investor should carefully consider the following risk factors inherent in,
and affecting the business of, the Company and the Offering, together with
the other information in this prospectus, before making an investment decision.
CHIEF EXECUTIVE OFFICER WILL NOT BE REQUIRED TO WORK FULL TIME. Miller,
is a co-founder of Duncan Hill, which is a publicly held holding corporation
that controls the Company and Kids Stuff. Miller is currently the President
of Duncan Hill, as well as Chairman of the Board of Directors and Chief
Executive Officer of Kids Stuff and the Company and the sole executive
officer of the Company. Miller's employment agreement with the Company
provides that he shall be permitted to devote such time to managing Duncan
Hill and Kids Stuff as he deems appropriate. Accordingly, Miller will not
be devoting his full-time attention to managing the operations of the
Company. See "Management."
DEPENDENCE UPON MILLER/NEED FOR ADDITIONAL MANAGEMENT. The success of
the Company is highly dependent upon the continued services of Miller, the
Company's only executive officer who is Chairman of the Board and Chief
Executive Officer and a part-time employee of the Company. Miller, one of
the co-founders of the Company's parent who is also an employee of Duncan
Hill and Kids Stuff, is responsible for the strategic planning and
development of the Company, pursuant to an employment agreement, expiring
December 31, 2002. However, if Miller's employment agreement with the
Company is either terminated or not renewed, or if he is unable to perform
his duties, there could be a material adverse effect upon the business of the
Company until a suitable replacement was found. The Company will attempt to
obtain a $1 million key man life insurance policy on Miller's life. The
success of the Company's future growth and profitability will depend, in
part, on the Company's ability to recruit and retain additional qualified
Management
14
<PAGE>
personnel over time, including a suitable candidate to succeed Miller, who is
61 years of age, as Chief Executive Officer. There can be no assurance,
however , that the Company will be able to recruit and retain such additional
qualified Management personnel. See "Management."
POTENTIAL CONFLICTS OF INTEREST. Conflicts of interest could potentially
develop (i) to the extent that Miller is not able to devote his full-time and
attention to a matter that would otherwise require the full-time and
attention of a business' chief executive officer, (ii) involving competition
for business opportunities, and (iii) involving transactions between the
Company and its affiliated companies. The Company has not adopted any
procedure for dealing with such conflicts of interest, except that the
Company's Board of Directors has adopted a policy that all new transactions
between the Company and Duncan Hill, Kids Stuff or any other affiliated
company must be approved by at least a majority of the Company's
disinterested directors. Currently, the Company has only one disinterested
director and Duncan Hill and Miller control the election of the directors
including the disinterested directors. See "Management" and "The Company and
it's Parent."
LACK OF AT LEAST TWO INDEPENDENT DIRECTORS AND COMMITTEES THEREOF. The
Company has three directors, including Miller who is the only executive
officer of the Company and another director who is a director of Duncan Hill,
an affiliate of the Company. The absence of at least two outside or
disinterested directors and committees composed of such disinterested
directors could result in less objectivity and an increased risk for
conflicts of interest with respect to decisions made by the Board of
Directors. See "Management."
CONTROL BY DUNCAN HILL AND MILLER. Upon completion of the Offering,
Duncan Hill and Miller (the "Control Group"), will beneficially own and
control (not including outstanding Class A Warrants and options)
approximately 54% of the Company's outstanding Common Stock (approximately
50% if the Underwriters' Over-Allotment Option is exercised in full), 100% of
the Company's outstanding Series A Preferred Stock (5,000,000 shares) which
has the same voting privileges as the Common Stock, and 100% of the Company's
Series B Convertible Preferred Stock (1,100,000 shares) which also has the
same voting privileges as the Common Stock and is convertible into the
Company's Common Stock if certain criteria are met. Accordingly, while the
new investors in the Offering will have provided approximately 93% of the
total consideration paid for the Company's outstanding Common Stock, the
Control Group will beneficially own approximately 89% of the Company's
outstanding voting capital stock. As a result, the Control Group will remain
in a position to effectively elect all of the directors of the Company and
control its affairs and policies. Miller and his wife beneficially own an
aggregate of approximately 68% of the shares of the outstanding common stock
of Duncan Hill, and thus are in a position to exercise effective control over
the affairs of the Company through their control over affairs of Duncan Hill.
Ultimate voting control by Miller may discourage certain types of
transactions involving actual or potential control of the Company, including
transactions in which the public holders of the Common stock might receive a
premium for their shares over prevailing market prices. See "Principal and
Selling Stockholders."
15
<PAGE>
HISTORY OF OPERATING AND NET LOSSES/UNCERTAINTY AS TO FUTURE OPERATING
RESULTS. The Company's bridge financing completed in January, 1998 will
result in a one time charge to earnings of approximately $1,820,000 in 1998.
See "Use of Proceeds-Bridge Financing." Previously, the Company experienced
losses for the years ended December 31, 1997 and 1996 of $61,772 and $115,523
respectively. The Company believes that in order to achieve profitability,
it must increase retail and catalog sales, expand the membership of the
Havana Group Direct and to effectively monitor and control costs.
Accordingly, there can be no assurance that the Company will operate
profitably in the future. Furthermore, future operating results depend upon
many factors, including general economic conditions, the level of competition
and the ability of the Company to continue to attract and retain customers
successfully. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
COMPANY GUARANTEE OF KIDS STUFF LINE OF CREDIT. The assets of the
Company are pledged as collateral along with the assets of Duncan Hill to
guarantee an $800,000 revolving bank line of credit in the name of Kids
Stuff, a subsidiary of Duncan Hill. The bank line of credit, which had a
balance of $732,000 at March 18, 1998, is for an open term, payable on
demand. The repayment of this credit facility is also irrevocably guaranteed
by Miller and Havana and cannot be terminated by them unless Kids Stuff pays
off the line of credit in full. In the event that Kids Stuff is unable to meet
the terms and conditions of the line of credit and the bank were to collect
against the Company as guarantor pursuant to an irrevocable guarantee, this
could adversely affect the Company's operations. In this respect, at December
31, 1997, Kids Stuff has working capital of $162,877 and a net worth of
$1,822,664. For the years ended December 31, 1997 and 1995, Kids Stuff
incurred a net profit (loss) of $50,097, $(521,640) and $(536,992),
respectively. Although United Bank has been requested by Kids Stuff to waive
the Company's guarantee, no assurance can be given that United Bank will
honor such request. See "Certain Transactions," "The Company and Its Parent"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
DEPENDENCE UPON KIDS STUFF, AN AFFILIATE OF THE COMPANY. The Company's
ability to effectively promote products, manage inventory, efficiently
purchase, sell and ship products, and maintain cost-effective operations are
each dependent upon the accuracy, capability and proper utilization of the
Company's outside data processing and telephone systems. The Company's
telemarketing, data processing, customer service and management information
systems functions are performed by and purchased from Kids Stuff, an
affiliate of the Company, pursuant to an agreement. A significant disruption
or loss affecting the telephone or computer systems or any significant damage
to Kids Stuff's facilities could have a material adverse effect on the
Company's business. The Company
16
<PAGE>
has an agreement with Kids Stuff to also provide the Company with order
fulfillment, warehousing, and administrative services. These services are
essential to the Company's operations. If for any reason whatsoever Kids
Stuff were unable to provide these services, the Company's operations may be
materially adversely affected until such time as the Company is able to
provide these services, itself or through an independent third party. See
"Certain Transactions," "The Company and Its Parent", and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON OFFERING PROCEEDS--PAYMENTS TO THE BRIDGE LENDER, MILLER AND
DUNCAN HILL. As a result of its operating results and lack of working
capital, the Company needs the proceeds of the Offering primarily for the
purchase of inventory, humidor construction and for working capital. Further,
approximately $50,000 has been allocated toward payment of Miller's salary,
approximately $110,000 of the net proceeds of the Offering will be paid to an
affiliate of the Company and approximately an additional $102,000 will be
paid to the Selling Security Holder. See "Use of Proceeds," "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
POSSIBLE NEED FOR ADDITIONAL FINANCING. The proceeds of the Offering are
estimated to be applied over a period of at least twelve months following the
completion of the Offering. The Company may require additional financing
during such twelve month period due to unforeseen events or to open
additional retail smoke shops. The Company does not currently have the
capital to open such additional retail smoke shops and is expected to be
dependent upon external financing beyond the proceeds of the Offering to meet
this potential objective. No assurances can be given that such financing will
be available or, if available, that such financing can be obtained on terms
satisfactory to the Company. See Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
CONSTRAINTS ON ABILITY TO SATISFY DEMAND FOR PREMIUM CIGARS. The Company
has experienced, and may from time-to-time experience a shortage of certain
cigars, especially premium cigars. Although many premium cigar manufacturers
have taken measures to increase production, there can be no assurance that
the Company will have access to sufficient supplies of premium cigars to meet
its customers expressed demands. The Company is not a party to long-term
supply contracts with any manufacturers. The Company relies upon the strength
of its relationships with leading manufacturers to meet its supply
requirements. There can be no assurance that the Company will be able to
continue to maintain these relationships or that such relationships will be
sufficient to enable the Company to meet future demand for its proprietary
cigars and other premium branded cigars which the Company sells. Any material
inability of the Company to expand its current supply of cigars in a timely
manner would have a material adverse effect on the Company's business,
results of operations and financial condition.
Cigar manufacturers have experienced, and continue to experience,
shortages of properly aged and blended tobacco ready for manufacturing, and
shortages in skilled employees for blending and rolling premium cigars. In
general, the aging process for
17
<PAGE>
tobacco requires that tobacco be purchased several years in advance of actual
use in the manufacturing process. Tobacco shortages may prevent the Company
from purchasing sufficient cigars to meet demand, maintaining its growth
expectations or even maintaining its current level of sales. These factors
are all outside the control of the Company, may significantly impact the
ability of the Company to secure an adequate supply of premium cigars in a
timely fashion and could have a material adverse effect on the Company's
business, results of operations and financial condition. See "Business."
POSITIVE TRENDS FOR CIGAR MARKET MAY NOT CONTINUE. According to industry
sources, the cigar industry experienced declining unit sales between 1964 and
1993. While the cigar industry has experienced increasing annual unit sales
since 1993, there can be no assurance that recent positive trends will
continue on a long-term basis or that new customers will remain cigar smokers
in the future. In addition, the market for premium cigars, and consequently
the Company's sales and results of operations, will be subject to
fluctuations based upon general economic conditions in the United States. If
there were to be a general economic downturn or recession in the United
States, the Company expects that the market for luxury related items such as
premium cigars would decrease. In the event of such an economic downturn or
recession, there can be no assurance that the Company's business, results of
operations and financial condition would not be materially adversely affected.
DEPENDENCE UPON ONE RETAIL SMOKESHOP. The Company owns and operates one
retail store opened in December 1997 (the "Smokeshop") and may open
additional retail cigar stores depending upon the success of its existing
store and available external financing. No assurance can be given that the
retail smokeshop will be profitable in the future or that any additional
Company stores will be opened and achieve profitability. The profitable
operation of any new retail stores is dependent on a number of factors,
including obtaining sufficient financing, identifying appropriate geographic
markets, evaluating the suitability of specific locations within such
markets, hiring, training and assimilating management and store level
employees, negotiating acceptable lease terms and constructing and opening
new stores in a timely and cost effective manner. There can be no assurance
that the Company will be able to successfully identify, open, finance and
operate additional retail stores. See "Business."
PRODUCT SOURCING. The Company acquires products for resale in its
catalogs from numerous domestic and international vendors. All "Carey" and
"Duncan Hill" pipes are manufactured by the Company's wholly-owned
subsidiary, Monarch. Monarch supplies approximately 16% of the Company's
catalog products. Other than Monarch, the Company currently has three vendors
that supply more than 10% of its catalog products. These companies include
Lane Limited (32.4%), Hollco-Rohr Co. (13.6%) and Consolidated Cigar Inc.
(12.7%). Any disruption of service from any of these companies may have an
adverse effect on the Company's future sales. See "Business-Product
Sourcing."
18
<PAGE>
POTENTIAL PRODUCT LIABILITY. There is a possibility that someone could
claim personal injury or property damage resulting from the use of products
purchased from the Company. As a seller of tobacco products, the Company is
exposed to potential liability. Since 1990, Duncan Hill has maintained, for
itself and its subsidiaries (including the Company), product liability
insurance. Currently, the amount of coverage is $1 million per occurrence and
$2 million in the aggregate. The policies are for a period of one year and
are currently in effect through September 17, 1998. Although the Company
believes that its present insurance coverage is sufficient for its current
level of business operations, there is no assurance that such insurance will
be sufficient to cover potential claims, or that adequate, affordable
insurance coverage will be available to the Company in the future. An
uninsured successful claim against the Company or a successful claim in
excess of the liability limits or relating to an injury excluded under the
policy could have a material adverse effect on the Company. See
"Business--Product Liability Insurance."
COMPETITION. The retail and mail order catalog business is highly
competitive. The Company's catalogs compete with several other cigar mail
order catalogs. The Company's retail store competes with other smokeshops,
estimated at over 1,000 in the United States. Most of the Company's
competitors have greater financial, distribution and marketing resources than
the Company. There can be no assurance that the Company will be able to
compete effectively with existing or potential competitors. See "Business--
Competition."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS. The tobacco
industry is subject to regulation in the United States at the federal, state
and local levels, and the recent trend is toward increasing regulation. A
variety of bills relating to tobacco issues have been recently introduced in
the United States Congress, including bills that, if passed, would: (i)
curtail the advertising and promotion of all tobacco products and restrict or
eliminate the deductibility of such advertising expenses; (ii) increase
labeling requirements on tobacco products to include, among other things,
addiction warnings and lists of additives and toxins; (iii) modify federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; (iv) shift regulatory control of
tobacco products at the federal level from the United States Federal Trade
Commission (the "FTC") to the United States Food and Drug Administration (the
"FDA") and require the tobacco industry to fund the FDA's oversight; (v)
increase tobacco excise taxes; (vi) restrict the access to tobacco products
by, among other things, banning the distribution of tobacco products through
the mail, except for sales subject to proof of age; (vii) require licensing
of retail tobacco product sellers; (viii) regulate tobacco product
development; and (ix) require tobacco companies to pay for healthcare costs
incurred by the federal government in connection with tobacco related
diseases. Although hearings have been held on certain of these proposals, to
date, none of such proposals have been passed by Congress. Future enactment
of such proposals or similar bills may have a material adverse effect on the
Company's business, results of operations and financial condition.
19
<PAGE>
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and
smokeless tobacco products are drug delivery devices used for the delivery of
nicotine. Although certain legal challenges to the FDA's determination are
pending, there can be no assurance that such determination will not be
upheld, nor that in the future, the FDA will not prevail in an attempt to
extend such jurisdiction to cigars. In addition, a majority of states
restrict or prohibit smoking in certain public places and restrict sale of
tobacco products (including cigars) to minors. Local legislative and
regulatory bodies have increasingly moved to curtail smoking by prohibiting
smoking in certain buildings or areas or by requiring designated "smoking"
areas. Individual establishments such as bars and restaurants have further
prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Further restrictions of a similar nature
could have a material adverse effect on the business, results of operations
and financial condition of the Company. Numerous proposals have also been
considered at the state and local level restricting smoking in certain public
areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation
has been introduced in other states. In addition, effective January 1, 1998,
smoking, including cigar smoking, has been banned by the State of California
in all bars, taverns and clubs where food and alcohol is served. Other
legislation recently introduced in Massachusetts would, if enacted, require
warning labels on cigar boxes. The states of Minnesota and Texas have enacted
legislation which require cigar manufacturers to provide information on the
levels of certain substances in their cigars to these states on an annual
basis. There can be no assurance that such legislation introduced in other
states will not be passed in the future or that other states will not enact
similar or more restrictive legislation. Consideration at both the federal
and state level also has been given to consequences of second hand smoke.
There can be no assurance that regulations relating to second hand smoke will
not be adopted or that such regulations or related litigation would not have
a material adverse effect on the Company's business, results of operations
and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. Increased publicity
may prompt research studies by various agencies such as the National Cancer
Institute, the American Cancer Society, and others. Such research can, by its
ultimate content, influence additional regulation of cigars by federal,
state, and local regulatory bodies. There can be no assurance that any such
legislation or regulation would not have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Business - Tobacco Industry - Government Regulations."
20
<PAGE>
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation. Private plaintiffs in
such litigation are seeking compensatory and, in some cases, punitive
damages, for various injuries claimed to result from the use of tobacco
products or exposure to tobacco smoke, and some of these actions have named
cigarette distributors as well as manufacturers as defendants. Over 40 states
have filed lawsuits against the major United States cigarette manufacturers
to recover billions of dollars in damages, primarily costs of medical
treatment of smokers. On June 20, 1997, the Attorneys General of 40 states
and several major cigarette manufacturers announced a proposed settlement of
the lawsuits filed by these states (the "Proposed Settlement"). The Proposed
Settlement, which will require Federal legislation to implement, is complex
and may change significantly or be rejected. The Proposed Settlement would
significantly change the way in which cigarette companies and tobacco
companies do business. Among other things, the tobacco companies would pay
hundreds of billions of dollars to the various states; the FDA could regulate
nicotine as a "drug" and tobacco products as "drug delivery devices;" all
outdoor advertising, sports event advertising and advertising on non-tobacco
products would be banned and certain class action lawsuits and punitive
damage claims against tobacco companies would be prohibited. President
Clinton recently announced that he would not support the Proposed Settlement
unless significant changes were incorporated. Therefore, the potential impact
of the Proposed Settlement on the cigar industry in general and the Company
in particular is uncertain. There can be no assurance that similar litigation
will not be brought against cigar manufacturers and distributors. The
potential costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any health-related litigation could
have a material adverse effect on the Company's business, results of
operations and financial condition. The State of Florida has entered into a
separate settlement agreement with major United States cigarette
manufacturers with respect to tobacco products, including roll-your-own and
little cigars. This settlement agreement provides, in part, for a ban on
billboard and transit advertising, significant document disclosure by the
settling cigarette companies, billions of dollars in settlement payments and
certain adjustments pending the resolution of the Proposed Settlement. The
State of Mississippi has announced a separate settlement agreement with major
cigarette manufacturers which provides for a payment of $4.0 billion,
however, if the Proposed Settlement is approved the Proposed Settlement will
supersede the Mississippi settlement. The recent increase in the sales of
cigars and the publicity of such increases may increase the probability of
legal claims. See "Business - Tobacco Industry Litigation."
21
<PAGE>
SALES TAX COLLECTION. Under current law, catalog retailers are permitted
to make sales in states where they do not have a physical presence (e.g.
offices) without collecting sales tax. Congress, however, has the power to
change these laws. Since 1987, legislation has been introduced periodically
in the U.S. Congress which would permit states to require sales tax
collection by mail order companies. To date, this proposed legislation has
not been passed. Should Congress, however, pass such legislation in the
future, most states could be expected to require sales tax collection by
out-of-state mail order companies. This would increase the cost of purchasing
the Company's products in those states and eliminate whatever competitive
advantage that the Company may currently enjoy with respect to in-state
competitors in terms of sales taxation, as well as increasing the
administrative and overhead costs to the Company in connection with the
collection of such sales tax. There can be no assurances given that these
state sales tax laws will not be changed in the future to the detriment of
the Company.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL TRADE.
The cigars sold by the Company are manufactured outside the United States,
principally in the Dominican Republic, Honduras, and Nicaragua. As a result,
the Company is exposed to the risk of changes in social, political and
economic conditions inherent in foreign operations and international trade
including changes in the law and policies that govern foreign investment and
international trade in such countries, as well as, to a lesser extent,
changes in United States laws and regulations relating to foreign investment
and trade. Any such social, political or economic changes could pose, among
other things, the risk of supply interruption or significant increases in the
prices of tobacco products. Any such changes in social, political or economic
conditions may have a material adverse effect on the Company's business,
results of operations or financial conditions.
TECHNOLOGICAL CHANGES IN DISTRIBUTION AND MARKETING METHODS. The retail
and direct marketing industry may be affected by ongoing technological
developments in distribution and marketing methods such as on-line catalogs
and Internet shopping. As a result, the Company's future success will depend
on its ability to keep pace with technological developments and respond to
new customer requirements. There can be no assurance that the Company's
current marketing methods will remain competitive in light of future
technological innovations. See "Business Marketing"
22
<PAGE>
MANAGEMENT'S BROAD DISCRETION IN THE APPLICATION OF PROCEEDS OF THE
OFFERING. A portion of the net proceeds of the Offering (approximately
$148,000 or approximately 7% of the net proceeds will be used for working
capital and general corporate purposes of the Company. Accordingly, since no
specific purpose of the funds allocated to working capital has been
identified, Management of the Company will have broad discretion in the use
of proceeds of the Offering allocated toward working capital. Further, the
Company's intended uses of the net proceeds of the offering are estimates
only and there could be significant variations in the uses of proceeds due to
changes in business or economic circumstances. Accordingly, the Company
reserves the right to reallocate the uses of proceeds depending upon any such
change of circumstances. See "Use of Proceeds."
PATENTS, TRADE NAMES AND TRADEMARKS. The Company owns two patents: one
for the Aerosphere Smoking systems; and one for the Carey Magic Inch Smoking
System. The Company also owns the registered trademarks of the Duncan Hill
smoking pipe, "Carey" the registered trade name for the Carey smoking pipe,
and "Magic Inch", the registered trade name of the Carey smoking system. All
trademarks and patents are currently maintained in effect, with the exception
of the U.S. patent for the Carey Magic Inch Smoking System which has expired.
There can be no assurance as to the extent of the protection that will be
provided to the Company as a result of having such patents, trademarks and
trade names or that the Company will be able to afford the expenses of any
complex litigation which may be necessary to enforce the proprietary rights.
See "Business--Patents, Trade Names and Trademarks."
23
<PAGE>
NO PRIOR PUBLIC MARKET VOLATILITY. Prior to the Offering, there has been
no public market for the Company's Units, Common Stock or Class A Warrants.
There is no assurance that following the Offering an active public trading
market will develop or be sustained or that the Units, Common Stock or Class
A Warrants will be resold at or above the initial public offering price.
Further, in the Concurrent Offering, the Company has registered for resale up
to 400,000 shares of Common Stock and up to 1,738,000 Class A Warrants and the
issuance of up to 1,738,000 shares of Common Stock pursuant to the exercise of
such Class A Warrants. The sale of the aforesaid securities may affect
adversely any market for the Company's securities that may develop.
Additionally, if a market does develop, the market price of the Company's
securities may trade below the initial public offering price in response to
changes in the general condition of the economy or the retail and catalog
business, as a whole, as well as the Company's periodic financial results
which may fluctuate quarterly as a result of several factors, including the
timing of catalog mailings, and changes in the selection of merchandise
offered and sold.
SEC INVESTIGATION INVOLVING THE REPRESENTATIVE. The Company has been
advised by the Representative that the Securities and Exchange Commission
("SEC") has issued an order directing a private investigation by the staff of
the SEC. Such order empowers the SEC staff to investigate whether, from June
1995 to the present, the Representative and certain other persons and/or
entities may have engaged in fraudulent acts or practices in connection with
the purchase or sale of securities of certain other companies in violation of
Sections 10(b) and 15(c)(1) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and Section 17(a) of the Securities Act. These
acts or practices include whether the Representative and certain other
brokers or dealers effected transactions or induced transactions by making
untrue statements of material fact and whether the Representative and certain
others have engaged in manipulative, deceptive or other fraudulent devices.
The formal order also concern whether the Representative and certain others
who have agreed to participate in a distribution have violated Rule 10b-6 of
the Exchange Act by having bid for or purchased securities for accounts
in which it had a beneficial interest or which is the subject of such
distribution. As of March 16, 1998, the Representative understands that the
SEC investigation is ongoing. The Representative cannot predict whether this
investigation will result in any type of enforcement action against the
Representative. See "Risk Factor"-"Possible Adverse Effect on Liquidity and
Price of the Company's Securities Due to SEC Investigation and NASD
Complaint" and "Underwriting."
NASD COMPLAINT AGAINST THE REPRESENTATIVE. The Company has also been
advised by the Representative that during 1996 and 1997, the staff of the
NASD conducted an inquiry into the trading and sales practices of securities
of another company in and around April 1995. In connection with the inquiry,
the NASD staff obtained documents from the Representative and conducted
on-the-record interviews of, among others, the
24
<PAGE>
Representative's Chief Executive Officer, Head Trader and Chief Financial
Officer. On February 20, 1998 the NASD Department of Enforcement filed an
administrative complaint against the Representative a principal of the firm
and two traders from other broker-dealers. The complaint alleges that the
Representative, acting through its then president and sole owner, acquired
and distributed certain securities of another corporation without
registration under Section 5 of the Securities Act representing approximately
28% of the available float in the security in purported violation of the NASD
Rule 2110. The complaint further alleges that at the same time the
Representative and its then president continued to make a market in the
corporation's stock in purported violation of Section 10(b) of the Exchange
Act and Rule 10b-6 thereunder and NASD Rules 2110 and 2120. Moreover, the
complaint alleges that the Representative and its then president caused the
aforementioned alleged unregistered distribution without filing the necessary
documents with the NASD's Corporate Financing Department and failed to
disclose to customers alleged unfair excessive and unreasonable compensation
received from the distribution in violation of NASD Rules 2110 and 2710. In
addition, the complaint alleged that the respondents fraudulently manipulated
the market for the corporation's common stock by arbitrarily increasing the
share price and by artificially inflating the reported trade volume through
"wash" and "matched" or circular trading so as to create the appearance of an
active market in the stock in purported violation of Section 10(b) of the
Exchange Act and Rule 10b-5 thereunder and NASD Rules 2110 and 2120.
According to the complaint, the alleged manipulation resulted in an illicit
profit to the Representative of approximately $402,509. The Representative and
its then president have indicated that they intend vigorously to contest the
allegations. A hearing has not yet been scheduled and there have been no
findings of fact or violations of law in this case. See "Risk
Factor"-"Possible Adverse Effect on Liquidity and Price of the Company's
Securities Due to SEC Investigation and NASD Complaint" and "Underwriting."
25
<PAGE>
POSSIBLE ADVERSE EFFECT ON LIQUIDITY AND PRICE OF THE COMPANY'S
SECURITIES DUE TO SEC INVESTIGATION AND NASD COMPLAINT. The Company has been
advised that in the event a public market for the Company's securities should
develop, of which no assurances can be given, the Representative intends to
make a market in the Company's Units and components thereof following the
Offering in the over-the-counter market, subject to compliance with
Regulation M of the Exchange Act. An unfavorable resolution of the SEC
investigation and/or NASD complaint concerning the sales and trading
activities and practices of the Representative could have the effect of
limiting or curtailing the Representative's ability to make a market in the
Company's securities in which case the market for and liquidity of the
Company's securities may be adversely affected. See "Underwriting" and "Risk
Factor-No Prior Public Market/Market Volatility."
IMMEDIATE AND SUBSTANTIAL DILUTION TO PUBLIC INVESTORS. The Offering will
result in an immediate and substantial dilution of the public's investment in
the Company because the $1.37 adjusted net tangible book value per share of
the Common Stock upon the completion of the Offering will be $4.63 per share
(77%) less than the $6.00 per share offering price of the share of Common
Stock without giving any value to the Class A Warrant included in the Unit.
See "Dilution."
RECENT SALES OF SECURITIES. Recently before the date of this Prospectus,
the Company entered into certain transactions pursuant to which the Company
issued and sold Series B Preferred Stock and securities convertible into
Common Stock and Class A Warrants at prices per share substantially below the
initial offering price of the Company's securities. These transactions can be
summarized as follows: On December 8, 1997, the Company sold 1,100,000 shares
of Series B Preferred Stock to Duncan Hill in exchange for Duncan Hill's
assumption of $300,000 of indebtedness owing to Kids Stuff. The Series B
Preferred Stock was recorded at an estimated fair value of $1,100,000. See
"Certain Transactions." On January 23, 1998, the Company issued a Convertible
Note to the Bridge Lender in the principal amount of $100,000 and a
Non-Convertible Note to the Bridge Lender in the principal amount of $100,000
in connection with a $200,000 loan to the Company. Upon the completion of the
offering, the Convertible Note automatically converts into 400,000 shares of
the Company's Common Stock (and 1,400,000 Class A Warrants) equivalent to
$.25 per share of Common Stock without attributing any value to the Class A
Warrants, which price is substantially below the public offering price of the
Company's Common Stock (i.e. $6.00 share without attributing any value to the
Class A Warrants included in the Units). The Non-Convertible Note is due and
payable upon the completion of the Offering. See "Use of Proceeds" and
"Selling Security Holders."
LIMITATION ON DIRECTOR LIABILITY. As permitted by Delaware corporation
law, the Company's Certificate of Incorporation limits the liability of
Directors to the Company or its stockholders to monetary damages for breach
of a Director's fiduciary duty except for liability in certain instances. As
a result of the Company's charter provision and Delaware law, stockholders
may have a more limited right to recover against Directors for breach of
their fiduciary duty other than as existed prior to the enactment of the law.
See "Management-Limitation of Directors' Liability and Indemnification
Matters."
26
<PAGE>
NO CASH DIVIDENDS TO HOLDERS OF COMMON STOCK. The Company has not paid
cash dividends on its Common Stock and does not anticipate paying cash
dividends in the foreseeable future. The Company intends to retain future
earnings, if any, to finance its growth. Notwithstanding the foregoing, the
Company intends to pay cash dividends to the holders of the Company's Series
B Preferred Stock. See "Description of Securities" and "Dividend Policy."
CERTAIN IMPLICATIONS OF TRADING-OVER-THE-COUNTER; "PENNY STOCK"
REGULATIONS. The Representative has applied and the Company expects the
Representative to receive approval for the quotation of the Company's Units,
Common Stock and Class A Warrants on the Over-the-Counter ("OTC") Electronic
Bulletin Board, although no assurances can be given in this regard. An
investor may find it more difficult to dispose of, or to obtain quotations as
to the price of, the Company's securities trading over-the-counter than had
the Company qualified for its securities to be listed for quotation on a
national securities exchange or the National Association of Securities
Dealers Automated Quotation System ("NASDAQ").
27
<PAGE>
The Securities and Exchange Commission has adopted "penny stock"
regulations which applies to securities traded over-the-counter. These
regulations generally define "penny stock" to be any equity security that has
a market price of less than $5.00 per share or a warrant that has an exercise
price of less than $5.00 per share or an equity security of an issuer with
net tangible assets of less than $2,000,000 as indicated in audited financial
statements, if the corporation has been in continuous operations for at least
three years. Subject to certain limited exceptions, the rules for any
transaction involving a "penny stock" require the delivery, prior to the
transaction, of a risk disclosure document prepared by the Commission that
contains certain information describing the nature and level of risk
associated with investments in the penny stock market. The broker-dealer also
must disclose the commissions payable to both the broker-dealer and the
registered representative and current quotations for the securities. Monthly
account statements must be sent by the broker-dealer disclosing the estimated
market value of each penny stock held in the account or indicating that the
estimated market value cannot be determined because of the unavailability of
firm quotes. In addition, the rules impose additional sales practice
requirements on broker-dealers who sell such securities to persons other than
established customers and institutional accredited investors (generally
institutions with assets in excess of $5,000,000). These practices require
that, prior to the purchase, the broker-dealer determined that transactions
in penny stocks were suitable for the purchaser and obtained the purchaser's
written consent to the transaction. If the Company's securities trade below
$5.00 per security after the Offering, they will be a penny stock unless the
Company has audited financial statements demonstrating net tangible assets of
at least $2,000,000. Consequently, the "penny stock" rules may restrict the
ability of broker-dealers to sell the Company's securities and may affect the
ability of purchasers in the Offering to sell the Company's securities in the
secondary market.
ARBITRARY DETERMINATION OF OFFERING PRICE. The initial public offering
price of the Units and the exercise price and other terms of the Warrants
have been arbitrarily determined by the Company and the Representative and do
not necessary bear any relationship to the assets, book value or net worth of
the Company or any other recognized criteria of value. Accordingly, such
prices should not be considered an indication of the Company's actual value.
See "Underwriting."
REPRESENTATIVE'S INFLUENCE ON THE MARKET; RESTRICTIONS ON MARKET MAKING
ACTIVITIES DURING WARRANT SOLICITATION. The Representative intends to make a
market in the Company's Units, Common Stock and Class A Warrants following
the Offering, although it is not obligated to do so and there can be no
assurance that a public market will develop. The Representative has advised
the Company that it anticipates that other broker dealers also will make a
market in the Company's securities, although no assurance can be given that
this will be the case. To the extent that the Representative acts as market
maker in the Company's securities, there may be dominating influences in that
market. The price and liquidity of the securities may be affected by the
degree, if any, of the Representative's participation in the market, because
a significant portion of those securities may be sold to customers of the
Representative. Such customers may subsequently engage in transactions for
the sale or purchase of the Company's securities through or with the
Underwriter. In the event that market making
28
<PAGE>
activities are commenced by the Underwriter, there is no obligation for it to
continue those activities.
The Representative has the right to act as the Company's sole agent in
connection with any future solicitation of Warrant Holders to exercise their
Class A Warrants. Unless granted an exemption by the Securities and Exchange
Commission from Regulation M promulgated under the Exchange Act, the
Representative will be prohibited from engaging in any market-making
activities with regard to the Company's securities until the later of the
termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Representative may have to receive a fee for
soliciting the exercise of the Class A Warrants. Such limitation could impair
the liquidity and market prices of the Common Stock and Class A Warrants. See
"Underwriting."
LIMITS ON SECONDARY TRADING. The Company will make application to
register or has or will seek to obtain an exception from registration to
offer the Units and intends to conduct its selling efforts in Colorado,
Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii,
Illinois, Louisiana, Maryland, New York, Rhode Island, Utah and Virginia (the
"Primary Distribution States"). Purchasers of the Units in the Offering must
be residents of such jurisdictions. In addition, the Units, Common Stock and
Class A Warrants will be immediately eligible for resale in the secondary
market, in the event that one does develop, in each of the Primary
Distribution States and in the state of Pennsylvania. Purchasers of any of
these securities in any secondary trading market which may develop must be
residents of such jurisdictions. Several additional states will permit
secondary market sales of these securities (i) once or after certain
financial and other information with respect to the Company is published in a
recognized securities manual such as Standard & Poor's Records Corporation;
(ii) after a certain period has elapsed from the date hereof; or (iii)
pursuant to exemptions applicable to certain institutional investors. The
Company intends to apply for listing in a recognized securities manual on or
about the date of this Prospectus, although there can be no assurance that it
will be accepted for such listing. Purchasers of Units in the Offering and
future purchasers of the Company's securities in the secondary market, in the
event that one does develop, may be restricted or prohibited from re-selling
the securities in particular states as a result of applicable blue sky laws.
These restrictions may reduce the liquidity of the securities and including
their market price.
UNDERWRITERS' UNIT PURCHASE OPTION. In connection with the Offering, the
Company will sell the Underwriters an option to purchase 46,000 Units (the
"Underwriters' Unit Purchase Option"). The Underwriters' Unit Purchase Option
will be exercisable commencing one year from the date of this Prospectus and
for four years thereafter at an exercise price of $9.00 per Unit. For the
life of the Underwriters' Unit Purchase Option, the holders thereof will have
the opportunity to profit from a rise in the market price of the Common Stock
and/or the Warrants without assuming the risk of ownership. The Company may
find it more difficult to raise additional capital if it should be needed for
the business of the Company while the Underwriters' Unit Purchase Option is
outstanding. At any time when the holders thereof might be expected to
exercise them, the Company would probably be able to obtain additional
capital on terms more favorable than those
29
<PAGE>
provided by the Underwriters' Unit Purchase Option. The Company has also
agreed to register the Underwriters' Unit Purchase Option and the underlying
securities covered thereunder in any future registration statement that the
Company may file during the four-year exercise period of the Underwriters'
Unit Purchase Option. This obligation could interfere with the Company's
ability to obtain financing under any future registration statement filing.
See "Underwriting."
POTENTIAL ADVERSE EFFECT OF REDEMPTION OR EXERCISE OF WARRANTS. The
Class A Warrants may be redeemed by the Company under certain circumstances.
Should the Company provide a notice of redemption of the Class A Warrants,
the holders thereof would be forced to either exercise the Class A Warrants
at a time when it may be disadvantageous for them to do so, sell the Class A
Warrants at the then current market price, or accept the redemption price,
which will likely be substantially less than the market value of the Class A
Warrants. In addition, the exercise of the Class A Warrants, may have an
adverse effect on the market price of the Company's securities should a
public trading market develop. Also, while the Class A Warrants are
outstanding, the Company may find it more difficult to raise additional
capital upon favorable terms because of the potential for the exercise of the
Class A Warrants to be dilutive to future investors. See "Description of
Securities."
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FOR FUTURE SALE. As of
the date of this Prospectus, the Company's outstanding unregistered
securities include 931,000 shares of the Company's Common Stock, 5,000,000
shares of the Company's Series A Preferred Stock, 1,100,000 shares of the
Company's Series B Convertible Preferred Stock, and options to purchase
260,000 shares of the Company's Common Stock (collectively the "Restricted
Securities"). The Restricted Securities are owned by Duncan Hill or the
Company's directors and are "restricted securities" as that term is defined
by Rule 144 of the Securities Act, and may only be sold in compliance with
the provision of Rule 144 unless otherwise registered by the Company. These
stockholders may elect to sell some or all of these shares as soon as they
are permitted to do so. Ordinarily, under Rule 144, a person holding
restricted securities for a period of one year may, every three months
thereafter, sell in ordinary brokerage transactions or in transactions
directly with a market maker, an amount of shares equal to the greater of one
percent of the Company's then outstanding Common Stock or the average weekly
trading volume in the same securities during the four calendar weeks prior to
such sale. For non-affiliated persons who own the Company's securities for at
least two years, the aforementioned volume restrictions are not applicable to
sales by such person. Furthermore, Duncan Hill and the directors of the
Company have agreed with the Representative not to sell or otherwise transfer
the Restricted Securities within 24 months of the date of this Prospectus
unless earlier permitted by the Representative. The possible or actual future
sales of the Restricted Securities under Rule 144 may have an adverse effect
on the market price of the Company's Common Stock should a public trading
market develop for such shares. See "Shares Eligible for Future Sale."
CURRENT PROSPECTUS AND STATE BLUE SKY REGISTRATION REQUIRED TO EXERCISE
CLASS A WARRANTS. The Company will be able to issue shares of its Common
Stock upon exercise
30
<PAGE>
of the Class A Warrants only if there is a then current prospectus relating
to the shares of Common Stock issuable upon the exercise of the Class A
Warrants under an effective registration statement filed with the Securities
and Exchange Commission, and only if such shares of Common Stock are
qualified for sale or exempt from qualification under applicable state
securities laws of the jurisdiction in which the various holders of the Class
A Warrants reside. Although the Company has agreed to use its best efforts to
meet such regulatory requirements, there can be no assurance that the Company
will be able to do so. The Class A Warrants may be deprived of any value if a
prospectus covering the shares of Common Stock issuable upon their exercise
is not kept effective or replaced or if such shares of Common Stock are not
or cannot be qualified or exempt from qualification in the jurisdictions in
which the holders of the Class A Warrants reside. See "Description of
Securities--Warrants." As of the date of this Prospectus, the Company
anticipates that its securities will be qualified for sale or exempt from
qualification only in the Primary Distribution States. See "Risk
Factors--Limits on Secondary Trading."
COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SECURITIES BY
SELLING SECURITIES HOLDERS. As more fully described under "Selling Security
Holders," a substantial number of securities have been registered for sale on
behalf of certain affiliated and non-affiliated persons as Selling Security
Holders. The Company will not receive any proceeds from the sale of
securities by the Selling Security Holdres. Accordingly, a substantial
portion of the proceeds to be received from the sale of all of the registered
securities will not be for the benefit of the Company. See "Selling Security
Holders."
ANTI-TAKEOVER MEASURES. The Company is subject to a Delaware statute
regulating business combinations that may serve to hinder or delay a change
in control of the Company, in addition to those matters relating to control
of the Company discussed immediately, above. Also, pursuant to the Company's
certificate of incorporation, the Company's Board of Directors may from time
to time authorize the issuance of additional shares preferred stock in one or
more series having such preferences, rights and other provisions as the Board
of Directors may decide. Any such issuances of preferred stock could, under
certain circumstances, have the effect of delaying or preventing a change in
control of the Company and may adversely affect the rights of the holders of
the Company's Common Stock and the market for those shares. There are no
other provisions, however, in the Company's certificate of incorporation or
bylaws that would serve to delay, defer, or prevent a takeover of the
Company. See "Description of Securities."
31
<PAGE>
USE OF PROCEEDS
The net proceeds to be received from the sale of the 460,000 Units offered by
the Company (after deducting underwriting discounts, a 3% non-accountable
expense allowance and other estimated offering expenses) will be
approximately $2,050,000 ($2,037,500 if the Underwriters' Over-Allotment
option is exercised in full). The Company intends to use the net proceeds of
the Offering over at least the next twelve months approximately as follows:
32
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
AMOUNT OF PERCENTAGE OF
NET PROCEEDS NET PROCEEDS
------------ ---------------
<S> <C> <C>
Inventory............................... $ 800,000 39%
Preferred Stock Dividend
to Duncan Hill (1)...................... 110,000 5
Payment of Bridge Lender................
Indebtedness (2)........................ 102,000 5
Marketing (4)........................... 100,000 5
Humidor Construction (3)................ 740,000 36
Officers' Salary 50,000 2
Working Capital (5)..................... 148,000 8
---------- ----
TOTAL............................... $2,050,000 100%
---------- ----
---------- ----
</TABLE>
- ------------------------
(1) The Company has allocated approximately $110,000 to be paid to Duncan Hill.
The $110,000 represents the first year's cash dividend on the Series B
Preferred Stock. See "Description of Securities."
(2) The Company has also allocated $102,000 to be paid to the Bridge Lender, who
is also a Selling Security Holder, in satisfaction of a non-convertible note
(including accrued interest at the rate of 8% per annum) which becomes due
and payable upon the completion of the Offering. See "Bridge Financing."
(3) The Company intends to construct its own climate controlled warehouse in
which each Havana Group member would receive an allocated portion serving as
such members personal humidor, capable of storing up to 50 boxes of cigars.
See "Business--Marketing."
(4) See "Business-Marketing."
(5) The Company intends to use the funds allocated toward general working
capital purposes primarily for paying for the ongoing expenses of being a
publicly held corporation and miscellaneous administrative expenses. In
the event that the Over-Allotment Option is exercised in full by the
Underwriters, working capital and the estimated net proceeds of the
Offering will be reduced by $12,420 which represents the amount of the
the expense allowance which the Company has agreed to pay for the benefit
of the Selling Unit Holder. See "Underwriting."
BRIDGE FINANCING
On January 23, 1998, the Company raised $200,000 in bridge financing from
ARO Trust #1, 1970 Trust (Linda Gallenberger, Trustee), a non-affiliated
investor, (the "Bridge Lender"). In exchange for the Bridge Lender making such
loan, the Company issued to the Bridge Lender a non-convertible note due the
earlier of the completion of the Offering
33
<PAGE>
or December 31, 1998 in the principal amount of $100,000 (the
"Non-Convertible Note") and a convertible note in the principal amount of
$100,000 due December 31, 1998 (the "Convertible Note"). The Convertible Note
and Non-Convertible Note are collectively referred to as the "Notes." Each
Note bears interest at the rate of eight (8%) percent per annum. The
Convertible Note automatically converts into 400,000 shares of the Company's
Common Stock and 1,400,000 Class A Warrants upon the consummation of the
Offering. The 1,400,000 Class A Warrants are identical to the Class A
Warrants offered hereby. The proceeds of the bridge offering were used by the
Company to pay certain expenses in connection with the Offering and to
increase working capital.
The Registration Statement, of which this Prospectus is a part, covers
the sale of the 400,000 shares of the Company's Common Stock and 1,400,000
Class A Warrants (and the exercise of the Class A Warrants by the transferees
of the Bridge Lender) that will be acquired by the Bridge Lender pursuant to
the conversion of the Convertible Note. See "Selling Security Holders."
DIVIDEND POLICY
The Company currently intends to retain any earnings to finance the
development and expansion of the Company's business and does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future,
although it intends to pay cash dividends to holders of the Series B
Preferred Stock. The declaration and payment of cash dividends by the Company
are subject to the discretion of the Board of Directors of the Company. Any
future determination to pay cash dividends will depend on the Company's
results of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant at the time by the Board of
Directors. The Company is not currently subject to any contractual
arrangements which restricts its ability to pay cash dividends. The Company's
Certificate of Incorporation prohibits the payment of cash dividends on the
Company's Common Stock in excess of $.05 per share per year so long as any
Serial Preferred Stock remains outstanding unless all accrued and unpaid
dividends on Serial Preferred Stock has been set apart and there are no
arrearages with respect to the redemption of any Series Preferred Stock
34
<PAGE>
DILUTION
The net tangible book value per share of the Company as of December 31,
1997 was approximately $.40 per share of Common Stock. Net tangible book
value per share is determined by dividing the tangible net worth of the
Company (tangible assets less all liabilities) by the total number of
outstanding shares of Common Stock (1,000,000 at December 31, 1997). The
Company's tangible assets consists of all of its balance sheet assets except
for intangible assets which consists of customer lists and deferred catalog
costs. After giving effect to the sale by the Company of 460,000 Units and
the receipt of the net proceeds therefrom and the conversion of the
Convertible Note into 400,000 shares of Common Stock, the adjusted net
tangible book value per share of the Company as of December 31, 1997 would
have been approximately $1.37. This represents an immediate increase in the
adjusted net tangible book value per share of $0.97 to existing Common
Stockholders and an immediate dilution (the difference between the price to
the public per share of Common Stock and the adjusted net tangible book value
per share of Common Stock after the Offering) in the adjusted tangible book
value of $4.63 per share of Common Stock (representing a dilution percentage
of approximately 77%)to new investors (assuming for this discussion that the
share of Common Stock comprising a $6.00 Unit is valued at $6.00 per share,
and the Class A Warrant included in the Unit has no value).
The following table illustrates this per share of Common Stock dilution:
<TABLE>
<S> <C> <C>
The initial price of a share of Common
Stock paid by new investors...................... $6.00
Adjusted net tangible book value per share
of Common Stock before the Offering.............. $0.40
Increase in adjusted net tangible book
value per share of Common Stock
attributable to new investors.................... 0.97
---------
Adjusted net tangible book value per share
of Common Stock after the Offering............... 1.37
---------
Dilution in adjusted net tangible book value
per share of Common Stock to new
investors....................................... $4.63
---------
---------
</TABLE>
35
<PAGE>
The following table summarizes, as of the completion of the Offering, the
differences between existing stockholders and new investors with respect to
the number of shares of Common Stock purchased from the Company and the total
and average cash consideration paid per share.
<TABLE>
<CAPTION>
APPROXI-
MATE APPROXIMATE
PERCENTAGE TOTAL CASH PERCENTAGE OF AVERAGE
SHARES OF TOTAL CONSIDERATION TOTAL PRICE PER
PURCHASED SHARES $ CONSIDERATION % SHARE $
---------- ------------- -------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Public Stockholders........................ 460,000 25 2,760,000 93 6.00
---------- --- -------------- --- ---
Present Stockholders (1)................... 1,400,000 75 210,000 7 .15
---------- --- -------------- --- ---
Total...................................... 1,860,000 100 2,970,000 100
---------- --- -------------- --- ---
---------- --- -------------- --- ---
</TABLE>
- ------------------------
(1) Upon the completion of the Offering, the Convertible Note in the principal
amount of an aggregate of $100,000 will automatically convert into 400,000
shares of the Company's Common Stock and 1,400,000 Class A Warrants. These
shares, but not the shares of Common Stock underlying the warrants, are
included as owned by present stockholders.
The foregoing does not include the following: (i) 920,000 shares of Common
Stock issuable upon the exercise of the Class A Warrants included in the Units
offered hereby; (ii) options to purchase 260,000 shares of Common Stock owned by
certain directors of the Company; (iii) warrants to purchase 138,000 shares of
Common Stock owned by the Selling Unit Holder and warrants to purchase 200,000
shares of Common Stock owned by Miller, which warrants upon the completion of
the Offering automatically convert into warrants identical to the Class A
Warrants; (iv) 1,400,000 shares of Common Stock issuable upon the exercise of
1,400,000 Class A Warrants attributable to a Selling Security Holder; (v)
1,100,000 shares issuable upon conversion of the Series B Preferred Stock; and
(vi) 138,000 shares of Common Stock issuable upon exercise of the Underwriters'
Unit Purchase Option and underlying warrants.
36
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1997, (i) the actual
capitalization of the Company, and (ii) the pro forma capitalization of the
Company, including the issuance of 400,000 shares of Common Stock and
1,400,000 Class A Warrants to the Selling Security Holder upon conversion of
the Convertible Note and the sale of 460,000 Units offered hereby and the
receipt of the estimated net proceeds therefrom. The table below should be
read in conjunction with the financial statements of the Company and notes
thereto included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
December 31, 1997
---------------------
PRO
ACTUAL FORMA(1)
--------- ----------
<S> <C> <C>
Stockholders' Equity:
Common Stock, The Havana Group, Inc. $.001 par
value, 25,000,000 shares authorized, 1,000,000
shares issued 1,860,000 shares issued and
outstanding pro forma................................... 1,000 1,860
Series A Preferred Stock, $.001 par value,
10,000,000 shares authorized, 5,000,000 shares
issued and outstanding actual, and
pro forma............................................... 5,000 5,000
Series B Convertible Preferred Stock, $.001 par value
10,000,000 shares authorized, 1,100,000 shares
issued and outstanding actual, and pro forma.............. 1,100 1,100
Additional Paid-in-capital.................................. 1,092,900 5,061,993
Retained Earnings(deficit).................................. (176,887) (1,998,887)
--------- ----------
Total Stockholders' Equity.................................. $ 923,113 $3,071,066
--------- ----------
</TABLE>
- ------------------------
37
<PAGE>
(1) Does not include the following: (i) 920,000 shares of Common Stock issuable
upon the exercise of the Class A Warrants included in the Units offered
hereby; (ii) options to purchase 260,000 shares of Common Stock owned by
certain directors of the Company; (iii) warrants to purchase 138,000 shares
of Common Stock owned by the Selling Unit Holder and warrants to purchase
200,000 shares of Common Stock owned by Mr. Miller, which warrants upon the
completion of the Offering automatically convert into warrants identical to
the Class A Warrants; (iv) 1,400,000 shares of Common Stock issuable upon
the exercise of 1,400,000 Class A Warrants attributable to a Selling
Security Holder; (v) 1,100,000 shares issuable upon conversion of the Series
B Preferred Stock; and (vi) 138,000 shares of Common Stock issuable upon
exercise of the Underwriters' Unit Purchase Option and underlying warrants.
38
<PAGE>
SELECTED FINANCIAL DATA
Set forth below are the selected financial data of the Company as of and
for the years ended December 31, 1995, 1996 and 1997. This selected financial
data as of and for the years ended December 31, 1995, 1996 and 1997 has been
derived from the historical financial statements of the Company, which
include the financial statements of its predecessor, Carey, and which have
been audited by Hausser +Taylor LLP, whose report with respect to such
financial statements appears elsewhere in the Prospectus. Also set forth
below are (i) adjusted selected financial data for the year ended December
31, 1997, which data has been derived from the Company's historical financial
statements included elsewhere in the Prospectus and reflects the completion
of a $200,000 bridge financing on January 23, 1998 and (ii) the pro forma
financial statements which give effect to the sale of 460,000 Units offered
hereby and the automatic conversion of the Convertible Note upon the
completion of the Offering into a total of 400,000 shares and 1,400,000 Class
A Warrants. The selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as the Company's historical financial statements and the
related notes, included elsewhere in the Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Statement of Operational Data:
Net Sales ................................. $ 1,668,927 $ 1,656,316 $ 1,427,574
Net Loss...................................... (64,626) (115,523) (61,772)
Net Loss per common share..................... $ (.06) $ (.12) $ (.06)
Weighted average number of shares
outstanding during the period (1)........... 1,000,000 1,000,000 1,000,000
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------
1995 1996 ACTUAL AS ADJUSTED(2) PRO FORMA (3)
------------ ------------ ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total Assets................. $ 1,557,547 $ 1,550,754 $ 1,240,228 $ 1,440,228 $ 3,388,181
Working Capital.............. 229,947 153,130 335,747 435,747 2,483,700
Total Liabilities............ 756,639 865,369 317,115 417,115 317,115
Stockholder's Equity......... 800,908 685,385 923,113 1,023,113 3,071,066
</TABLE>
- ------------------------
(1) Reflects the reincorporation and recapitalization of Carey in Delaware. "The
Company and its Parent--Reorganization."
(2) Reflects the completion of $200,000 of bridge financing. See "Management's
Discussion and analysis of Financial Condition and Results of Operation,
"Use of Proceeds-Bridge Financing" and "Certain Transactions."
(3) Reflects the sale of 460,000 units offered hereby, and the receipt of the
net proceeds and repayment of $102,000 including estimated accrued interest.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
This discussion should be read in conjunction with the information in the
financial statements of the Company and notes thereto appearing elsewhere in
this Prospectus.
Overview
The Company currently derives its revenues from three sources; retail
sales from the Smokeshop, direct mail of catalogs and from the operation of
its Carey Tobacco Club. During the year ended December 31, 1997, the Company
mailed 389,540 catalogs which generated sales of $1,097,670, approximately
74% of total gross revenue. Carey Tobacco Club, a monthly program of tobacco
shipments that supply pipe tobacco to individual Club members, generated
$368,009 in gross sales, representing approximately 25% of total gross
revenue. The Smokeshop was opened on December 8, 1997 and generated sales of
$8,781 for remainder of December 1997.
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996.
Total net sales for the year ended December 31, 1997 decreased
$228,742 or 13.8%, to $1,427,574, compared with $1,656,316 during the year
ended December 31, 1996. Net sales include sales from merchandise,
shipping and handling charges and mailing list rental. This decrease was largely
attributable to two items. First, sales from tobacco club members decreased
$251,870, or 40.6%, from $619,879 to $368,009 for the year ended
December 31, 1996 and 1997, respectively. Tobacco club memberships decreased
from approximately 2,530 at December 31, 1996 to approximately 2,070 at
December 31, 1997. Second the Company operated a retail outlet store,
"Carey's Smokeshop," until October 1996. Net sales through December 31, 1996
were $57,389, compared to sales of $8,781 for the year ended December 31,
1997. The Company has decided to terminate the outlet store concept and
concentrate on an upscale retail store, The Havana Group (the "Smokeshop").
The Company recently opened the Smokeshop during December 1997 in an
off-mall location in Canton, Ohio.
The above mentioned decreases were partially offset by an increase in
catalog sales. Net sales attributable to the catalog increased 7.3%, from
$979,048 for the year ended December 31, 1996, to $1,050,784 for 1997. This
increase came from an increase in net revenue per catalog mailed of $.49,
from $2.19 to $2.68 for the year ended December 31, 1996 and 1997,
respectively.
40
<PAGE>
Cost of sales as a percentage of net sales decreased from 57.7% for 1996
to 54.2% for 1997. The largest factor for this was the decrease in
merchandise costs, as a percentage of net sales. Merchandise costs decreased
from 36.9% to 33.3% of net sales, from 1996 to 1997. The Company attributes
this decrease to increased prices, which it believes helped produce increased
margins.
Selling expenses, as a percentage of net sales, decreased from 22.6%
for 1996 to 22.2% for 1997.
General and administrative expenses were $398,952, or 27.9% of net
sales, for the year ended December 31, 1997, and $450,876, or 27.2% of net
sales, for the same period of 1996.
This dollar decrease is attributable to a decrease in the allocation
from the affiliate handling administrative functions for the Company. General
and administrative expenses for 1996 were incurred by Duncan Hill, and
allocated to the Company and Kid Stuff based on the percentage of assets of
each operating subsidiary to the total assets for both operating
subsidiaries, exclusive of the assets of Duncan Hill. For 1996, the Company's
and Kid Stuff's allocation was 31% and 69%, respectively, of Duncan Hills
total general and administrative expenses. Effective January 1, 1997, the
Company began purchasing administrative functions from Kids Stuff. General
and administrative expenses incurred by Kids Stuff were allocated to the
Company, on a pro rata basis determined by the respective percentage of total
assets of the Company and Kids Stuff. For the six months ended June 30,
1997, the Company's allocation was 33% of the total general and
administrative expenses. For the six months ended December 31, 1997, the
Company's allocation was 21% of the consolidated total general and
administrative expenses, due to the acquisition of a catalog by Kids Stuff.
See "Certain Transactions" and "The Company and Its Parent."
Net loss for the year ended December 31, 1997 was $61,772, or 4.3% of
net sales. Net loss for 1996 was $115,523, or 7.0% of net sales. This
improvement is attributable to decreased cost of sales.
41
<PAGE>
Liquidity and Capital Resources
At December 31, 1997, the Company had a deficit in retained earnings of
$176,887, compared to retained earnings of $684,885 at December 31, 1996.
This resulted from a net loss of $61,772 for the year ended December 31,
1997 and an $800,000 adjustment to estimated fair value of 1,100,000 shares
of Series B Preferred stock issued to Duncan Hill.
For the year ended December 31, 1997, the impact of the operating loss
on the Company's cash position was increased by changes in working capital
which effected operating activities. The operating activities consumed
$224,327 in cash through increases in accounts receivable, inventories,
deferred catalog expenses and prepaid expenses, but provided $37,104 from an
increase in accounts payable, customer advances and other accrued expenses.
The net effect of these changes and non-cash charges of $39,780 relating to
depreciation and amortization, when added to the Company's net loss, resulted
in net cash used by operating activities of $209,215.
42
<PAGE>
For the year ended December 31, 1996, the impact of the operating loss
on the Company's cash position was offset by the use of cash of $5,422
through increases in deferred catalog expense and an increase in prepaid
expenses, but provided $113,978 in cash through a decrease in accounts
receivable, inventories and an increase in accounts payable, customer
advances and other accrued expenses. The net effect of these changes and
non-cash charges of $38,706 relating to depreciation and amortization
resulted in cash provided by operating activities was $31,739.
For the year ended December 31, 1997, the Company's financing activities
provided $378,322 in cash, from changes in current obligations to/from
affiliates, and used $500 for the return of additional capital contribution
to Duncan Hill for net cash used by financing activities of $377,822. The
Company's investing activities used $94,891 in investments in fixed assets
during 1997. For 1996, the Company's financing activities used $35,165 in
cash.
For the year ended Decmeber 31, 1997, the combined effect of net cash
used by operating activities of $209,215, net cash provided by financing
activities of $377,822, and cash used by investing activities of $94,891
resulted in an increase in cash of $73,716 from $5,895 at December 31, 1996
to $79,611 at December 31, 1997. For the year ended December 31, 1996, the
combined effect of net cash provided by operating activities of $31,739, and
net cash used by financing activities of $35,165 decreased cash from $9,321
to $5,895 at December 31, 1996.
The Company has no credit facility at the current time. However, the
assets of the Company are pledged as collateral along with the assets of
Duncan Hill to guarantee an $800,000 bank line of credit in the name of Kids
Stuff. Kid Stuff's bank line of credit had a balance of $732,000 at March
18, 1998. The line of credit is for an open term, payable on demand. The
repayment of the facility is guaranteed by Miller and the Company and is not
terminable without the line-of-credit being paid in full. Interest is charged
at the rate of 1% over prime. It is the policy of the bank to review the
credit facility annually, and to require that the Company maintain a zero
balance on the credit line for a period of thirty consecutive days sometime
during the course of each year. The bank agreed to waive the "zero balance"
required for the 1997 loan year ended June 30, 1997, because Kids Stuff's
current cash flow would not allow it to comply before then.
In December 1997, the Company's predecessor, Carey, effected a
reincorporation in Delaware and recapitalized the Company by replacing the
100 shares of no par value Carey common stock owned by the Company's parent,
Duncan Hill with 1,000,000 shares of the Company's $.001 par value Common
Stock and 5,000,000 shares of Series A Preferred Stock (and 138,000 warrants
which automatically, upon the completion of the Offering, convert into Class
A Warrants identical to those sold in the Offering) through a stock split and
stock dividend.
43
<PAGE>
The Company also issued to Duncan Hill 1,100,000 shares of Series B
Convertible Preferred Stock in exchange for Duncan Hill's assumption of a
$300,000 liability due to Kids Stuff. The Series B Convertible Preferred
shares are convertible at the option of the holder into the Company's Common
Stock at any time after the Company's pre-tax earnings reach $500,000 in any
given calendar year on a one to one conversion basis. See "Certain
Transactions" and "Description of Securities."
On January 23, 1998, the Company raised $200,000 in bridge financing
from the Bridge Lender. The Company issued the Non-Convertible Note due the
earlier of the completion of the Offering or December 31, 1998 in the
principal amount of $100,000 and the Convertible Note in the principal amount
of $100,000 due December 31, 1998. Each Note bears interest at the rate of
eight (8%) percent per annum. The Convertible Note automatically converts
into a total of 400,000 shares of the Company's Common Stock and 1,400,000
Class A Warrants upon the consummation of the Offering. See "Use of Proceeds
- - Bridge Financing" and "Selling Security Holders." As a result of this
financing, the Company will recognize a one time charge to earnings of
approximately $1,820,000 in 1998. See "Notes to Consolidated Financial
Statements, Note 4E-Sale of Unregistered Securities."
Effective January 1, 1998, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an
annual cost of $206,100. Kids Stuff is also providing fulfillment services to
the Company at a cost of $2.40 per order processed. The aforesaid $206,100
and $2.40 per order processed is based upon actual costs incurred by Kid
Stuff in 1997. The Company is also obligated to pay 5% of 1998 pre-tax
profits to Kids Stuff in connection with these administrative and
fulfillment services. See "The Company and its Parent" and "Certain
Transactions."
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to
44
<PAGE>
employees. As a result, there will be no effect to the Company other than to
require a pro forma footnote disclosure. See "Notes to Consolidated Financial
Statements, Note 8 - Fair Value of Stock Based Compensation."
As of the date of this Prospectus, the Company has granted its three
directors options to purchase an aggregate of 260,000 shares of the Company's
Common Stock at an exercise price of $6.00 per share. These options contain
provisions pursuant to which the exercise price will decrease based upon the
Company's operating performance. The Company does not anticipate that these
options will have any material impact on its future operations.
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share", and SFAS No. 129, Disclosure of Information
About Capital Structure." SFAS 128 establishes new standards for computing
and reporting earnings per share. SFAS No. 129 requires an entity to explain
the pertinent rights and privileges of outstanding securities. The Company
has adopted these new standards in the period ended December 31, 1997. All
prior period earnings per share data have been restated for the adoption of
SFAS 128. The effect of adoption was not material.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. SFAS No. 130 establishes new standards
for reporting comprehensive income and its components. The Company expects
that comprehensive income (loss) will not be materially different from net
income (loss).
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS No.
131 changes the standards for reporting financial results by operating segments,
related products and services, geographic areas and major customers. The
Company must adopt SFAS No. 131 not later than December 31, 1998.
Management believes that the effect of adoption will not be material.
THE COMPANY AND ITS PARENT
History of Duncan Hill
The Company's parent, Duncan Hill, was organized under Ohio law in 1977 for
the purpose of developing and marketing a designer line of smoking pipes,
tobacco and accessories. Duncan Hill is a publicly held corporation controlled
(approximately 68%) by William L. Miller, the Company's Chief Executive
Officer. In 1980, a Duncan Hill
45
<PAGE>
subsidiary, Highland Pipe Company, acquired the pipe manufacturing business of
the Monarch Pipe Co., of Bristow, Oklahoma. In 1984, the business of E.A. Carey
Co. of Chicago, a mail order supplier of smoking products, was purchased by
Duncan Hill through its subsidiary, Carey.
Perfectly Safe, Inc. was formed by Duncan Hill in 1990 under Ohio law for
the purpose of publishing The Perfectly Safe Catalog, which was acquired from
Jeanne E. Miller in January, 1990. Mrs. Miller purchased the Perfectly Safe
Catalog in 1988 from the catalog's creator. In July, 1995, Perfectly Safe, Inc.
began to publish its second catalog, Jeannie's Kids Club. Duncan Hill combined
its children's operations into a separate subsidiary, Kids Stuff during 1996 and
acquired a third children's catalog in June 1997. Kids Stuff funded the
acquisition with a public offering and is currently traded on the OTC Bulletin
Board under the symbol "KDST."
Prior to January 1, 1997, all fulfillment and administrative services of
the Company were performed and paid for by Duncan Hill which also provided
similar services to its subsidiary, Kids Stuff. Fulfillment services included
order taking, order processing, customer service, warehouse packing and
delivery, telephone contracts and shipping contracts. Fulfillment services were
charged to the Company and Kids Stuff based on the actual cost. Administrative
services included wages and salaries of officers, accounting, purchasing,
executive and creative/marketing personnel. It also included, all leases,
contracts, equipment rentals and purchases, audit, legal, data processing,
insurance and building rent and maintenance. The administrative costs were
allocated by Duncan Hill to the Company and Kids Stuff based upon the percentage
of assets for each operating subsidiary to the total assets for all operating
subsidiaries. The percentages for 1996 were 31% to the Company and 69% to Kids
Stuff.
During 1997, all administrative and fulfillment services were performed or
paid by Kids Stuff on behalf of the Company. All fulfillment services were
contracted and paid by Kids Stuff and charged to the Company based on the
actual cost. All administrative costs were allocated between the Company and
Kids Stuff based upon the percentage of assets for each respective operating
company to the total assets for both operating companies with 33% charged to
the Company for the period January 1, 1997 through June 30, 1997 and 21% charged
to the Company for the period July 1, 1997 through December 31, 1997. Duncan
Hill incurred certain other costs which included legal and outside
accounting/auditing expenses. These costs were allocated to the Company and
Kids Stuff based on the same method and percentages as described above.
Effective January 1, 1998, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an annual
cost of $206,100 based upon the following: $34,000 for accounting and payroll
services, $51,600 for administration and human resource management, $34,900 for
data processing, $32,200 for office equipment and facilities use, $38,100 for
merchandising and marketing services and $15,300 for purchasing services. Kids
Stuff is also providing fulfillment services to the Company at a cost of $2.40
per order processed. The Company has calculated these fees
46
<PAGE>
based on actual 1997 costs, and it is Management's belief that these fees would
represent actual costs should the Company undertake to provide these services
itself. The Company is also obligated to pay Kids Stuff an amount equal to 5%
of the Company's 1998 pre-tax profits as additional consideration for Kids Stuff
providing the Company with administrative and fulfillment services. In addition
to the above, the Company also expects to incur additional administrative costs
such as the salaries of the Company's Chief Executive Officer, legal,
accounting, depreciation and amortization and tax expenses which costs will be
incurred by and paid for directly by the Company. See "Certain Transactions."
The Reincorporation
Effective December 5, 1997, the Company succeeded to the Carey's Smokeshop
Catalog and pipe manufacturing business of Carey, a subsidiary of Duncan Hill,
as a result of a reincorporation in which Carey was merged into and with its
wholly-owned subsidiary, The Havana Group, Inc., the surviving corporation. In
connection with the reincorporation, the Company issued Duncan Hill 1,000,000
shares of Common Stock and assumed all of the liabilities of Carey.
47
<PAGE>
BUSINESS
General
The Company is a Delaware corporation engaged in the business of (i)
operating a retail smokeshop in Canton, Ohio which primarily sells pipes,
cigars and smoking accessories; (ii) marketing pipes, tobaccos and related
accessories directly to consumers through its 48 page full color catalog (the
"Carey Smokeshop Catalog"); and (iii) providing a program of automatic
periodic shipments of tobacco directly to consumers (the "Carey Tobacco
Club"). The Company intends to create and develop a Cigar Club (the "Havana
Group Direct") pursuant to which the Company will charge certain membership
fees and offer certain cigar purchasing, warehousing and shipping services in
return for membership, purchasing and shipping fees. The Company does not sell
cigarettes. See "Use of Proceeds".
The Company through Carey has been in business for over 40 years. Carey was
formed to sell the patented Carey "Magic Inch" smoking pipe exclusively
through mail order during the 1960's and 1970's. In 1984, Duncan Hill
purchased Carey. Since then, Carey (and now the Company) has operated as a
subsidiary under Duncan Hill's control.
The Company has one subsidiary, Monarch, which is
a wholly owned subsidiary of the Company. Monarch manufactures pipes which
are exclusively sold by the Company. Monarch is located in Bristow Oklahoma
and produces the Carey and Duncan Hill smoking pipes. Monarch employs three
people and has the production capacity of 20,000 smoking pipes per year. The
wood used to produce the smoking pipes (i.e. briarwood) is purchased on a
semi-finished basis and Monarch completes the assembly and finishes the final
product. Products produced by Monarch are marketed as middle market pipes,
with retail prices ranging from approximately $20 to $40 and with factory
costs of $6.00 to $9.50 per unit.
Strategies
The Company believes that its expertise in the marketing and
merchandising of smoking products and the recent introduction of the
Smokeshop will provide the basis for future growth by use of the following
strategies:
Development of the Havana Group Direct. The Company plans to develop the
Havana Group Direct, a direct marketing cigar club. The Company would obtain
membership inquiries through magazine and newspaper advertisements, and solicit
memberships by offering services in return for an annual membership fee.
Services would include providing individual humidor space for up to 50 boxes of
cigars, a personalized buying service for the member's cigar preference, and a
periodic newsletter of items of interest for cigar smokers. See "Marketing."
The Smokeshop. The Company had operated a smokeshop named "Carey's
Smokeshop" from 1984 to 1996 to maintain a retail presence and provide the
Company with a factory outlet for its overstock products which have not been
sold through the Carey Smokeshop Catalog or the Carey Tobacco Club. In
October 1996, the Company closed its retail store, leased an off-mall retail
location in Canton, Ohio, and reopened as "The Havana Group" (hereinafter
referred to as the "Smokeshop") on December 8,1997. The Smokeshop sells
pipes, cigars and smoking accessories (and is not limited to over-stock
items) and intends to sell other product lines, including fine wines and
imported beers. The Company has applied for a license to sell such liquor
products and is currently waiting to receive such license. See "Other
Regulatory Matters." The Company may expand the number of retail stores
depending upon the success of its existing store and available external
financing, if any.
48
<PAGE>
Maintain Carey's Smokeshop Catalog. The Company believes that Carey's
Smokeshop Catalog provides a good initial revenue base. However, the Company
believes that it must maintain and expand this customer base.
Merchandising
The Company designs all of its Carey "Magic Inch" and Duncan Hill
"Aerosphere" smoking pipes and produces them at its Monarch Pipe facility in
Oklahoma. The current Carey catalog contains 20 design groups marketed as
various series, such as "The Executive Collection" or "Carey Classic Series."
Additionally, the Company offers other hand made imported smoking pipes in its
catalog, generally at retail prices from $35.00 to $85.00 each. The Company
sources these products from international suppliers and from domestic
distributors of imported pipes.
The Company merchandises tobaccos and cigars from domestic sources,
which either import their products or manufacture in this country. Carey
offers 28 tobacco blends in its current catalog, along with 23 different
brands and sizes of cigars. Because of the composition of the catalog
customer base, cigar sales are generally mid-range in the cigar market, with
the most popular cigar the Carey Honduran bundle, which retails from $1.00 to
$1.50 per cigar. Because of the upscale target market of the retail store,
cigar sales range from $2.50 to $4.50 per cigar, with an average price of
$2.75 per cigar with Arturo Fuente, the most popular cigar.
The Company intends to merchandise cigars for its Havana Group Direct
marketing cigar club by offering its own private label "Havana Group" cigar,
plus other well known and established brand names, such as "Arturo Fuente",
"H. Upmann", "Dunhill", "Montecruz", "Partagas", "Punch", "Ashton",
"Macanudo", and others. It is the Company's intent to price brand name
cigars at full retail markups and then offer the club member a discount for
purchases in box quantities for storage in their Havana Group personal
humidor. Private label "Havana Group" cigars will be value priced to attract
club members.
Marketing
Currently, the Company markets its products directly to consumers through
its "Carey's Smokeshop" catalog, and through its "Carey Tobacco Club". For the
year ended December 31, 1997, Carey mailed 389,540 catalogs, which
generated average gross revenues of $2.82 per catalog mailed. The catalog
consists of 48 full color pages, with approximately 77% offering pipes,
tobaccos, and related accessories, approximately 17% offering cigars and cigar
related accessories and the remaining balance of the catalog offering various
men's products.
Carey Tobacco Club, in operation since 1975, is a program of automatic
periodic shipments of tobacco directly to consumers. Members are solicited in
the catalog, and in return for their membership agreement they are offered
products at a discounted price. The member selects the blend, the quantity of
tobacco per shipment and the frequency of the shipments. Billing is by credit
card or a Carey open account. Carey Tobacco Club
49
<PAGE>
relies upon brand loyalty, and the Company estimates that 80% of the Club
membership have been members in excess of five years. At December 31, 1997,
Carey Tobacco Club had 2,070 active members who placed 20,122 orders during
the year ended December 31, 1997, and generated for the Company $368,009 in
gross sales for 1997.
The Company plans to create and develop the "Havana Group Direct", a
direct marketing cigar club. The Company would develop its member base using
the same marketing methods it has historically used in the smaller pipe and
tobacco business, namely using magazine and newspaper advertising to generate
a Havana Group inquiry and then converting the inquiry to a membership using
direct marketing techniques, including direct mail, video tapes, and
telemarketing. The Company has retained Simmons Market Research Bureau to
identify advertising media containing cigar smokers of similar demographic
characteristics. The Company believes that it can successfully generate
Havana Group cigar club members on the aforementioned basis and has allocated
$100,000 of the proceeds of the offering towards implementing this marketing
plan. See "Use of Proceeds."
The Company plans to offer its Havana Group Direct cigar club membership
on an annual fee basis, and to offer certain services in return for the
membership fee. The Havana Group Direct would construct its own
climate-controlled warehouse, and each member would receive their personal
humidor capable of storing up to 50 boxes of cigars within the Havana Group
Direct humidified warehouse. The Havana Group Direct would encourage
purchase and collection of fine cigars by each member, and distribute those
cigars to the member in any requested quantity by first and second day air
shipment. Each member would be invoiced for the purchase of the cigars and
courier service. To encourage collection of fine cigars, Havana Group Direct
would offer a personal buying service for any premium cigar desired by the
individual member (however, the Company will not sell products made in Cuba).
The product would be supplied from stock or, alternatively, would be sourced
and purchased for the member's account. Upon receipt, the cigars would be
shipped to the member or placed in the member's personal humidor for later
distribution as requested. Havana Group Direct would identify this as
"Concierge Level" services. The Company has allocated $740,000 of the
proceeds of the Offering for Humidor Construction. See "Use of Proceeds."
Havana Group Direct anticipates that all cigars cannot be supplied from
its own inventory, and that many requested brands will be subject to
deliveries from the major manufacturers. In cases where the requested cigars
are not in stock at the time of the member's request, Havana Group Direct
will place the cigars on order for the member's account. The status of the
order will be published monthly in The Havana Group Newsletter, along with
the status of all cigars on order for the Havana Group Direct. Delivery
information will be presented much in the same manner as futures are quoted
in the Wall Street Journal, with brands, sizes, shapes, on-order, and
available remaining quantities noted. In this manner, The Havana Group
Direct member can purchase cigar future deliveries for their own account.
Additionally, The Havana Group Newsletter would contain items of information
and interest regarding cigars and related products.
The Company had operated a retail outlet, "Carey's Smokeshop", since 1984.
In October 1996, the Company closed the outlet, redesigned the planning and
marketing strategies, and reopened the Smokeshop in Canton, Ohio, as The "Havana
Group" during
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<PAGE>
December 1997. It is the Company's intent to open additional smokeshops through
Company owned and operated or franchise facilities depending upon the success of
its current store and the availability of external financing, of which no
assurances can be given in this regard. The Company believes that additional
retail smokeshops can be readily developed in off-mall locations.
Any new retail outlets would offer product groups proven historically in
the smokeshop industry, and may add other product lines, such as fine wines
and imported beers, depending upon the Company's ability to obtain all
requisite liquor licenses. At its current location, the Company has
determined the mix of product by taking proven product lines of smokeshops,
and deleting certain product lines inconsistent with The Havana Group image.
Such product lines dropped include domestic cigarettes, smokeless tobacco,
candy, gum, snacks and greeting cards.
Customer Service and Telemarketing
The Company currently derives approximately 75% of its revenues through
orders placed over the telephone and emphasizes superior customer service.
The Company's payment terms have been major credit cards, checks or open
account. The Company's return policy is unconditional, and provides that if a
customer is not satisfied with his or her purchase for any reason, it may be
returned within 30 days for a full refund or exchange. If a shipping error
has occurred the Company will issue call tags to pick up merchandise shipped
in error and will send a corrected shipment. The Company's return rate is
approximately 3-1/2% of sales. The Company purchases telemarketing services
from its affiliate, Kids Stuff. See "Certain Transactions." Kids Stuff
Fulfillment and Delivery
The Company's fulfillment and delivery objective is to provide excellent
customer service within a low cost structure. The Company purchases its
fulfillment operations from its affiliate, Kids Stuff. See "Certain
Transactions." Kids Stuff's facility consist of 18,000 square feet of leased
facilities in North Canton, Ohio. The facility is designed to process
incoming shipments on a palletized or boxed basis, and to process outgoing
shipments on an individualized cost effective basis. Orders shipped are
individually recorded and posted through the use of barcode scanners, so that
sales records and credit card deposits are electronically posted. Kids
Stuff's fulfillment center processed over 588,605 shipments in 1996 and 1997.
51
<PAGE>
Inventory/Purchasing
The Company conducts its purchasing operations at its general offices in
Canton, Ohio. Each catalog contains approximately 326 products or stock
keeping units (SKU's). Each product is reviewed weekly through the use of
computerized reports that provide detailed information regarding inventory
value, unit sales, and purchasing delivery times. Products are ordered as
required for the Company's inventory.
Product Sourcing
The Company acquires products for resale in its catalogs from numerous
domestic and international vendors. All "Carey" and "Duncan Hill" pipes are
manufactured by the Company's wholly-owned subsidiary, Monarch. Monarch supplies
approximately 16% of the Company's catalog products. Other than Monarch, the
Company currently has three vendors that supply more than 10% of its catalog
products. These companies include Lane Limited (32.4%), Hollco-Rohr Co. (13.6%)
and Consolidated Cigar Inc. (12.7%). Any disruption of service from any of
these companies may have an adverse effect on the Company's future sales.
Although these suppliers provide a substantial portion of the Company's catalog
product, the Company believes that, with the exception of products made by
Monarch, most products can be sourced from alternative suppliers. The Company
acquires products for sale in the retail store from approximately 56 domestic
vendors.
Seasonality
The Company's revenues are not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The
Smokeshop customer is believed to be generally the end user of the product so
purchases are spread throughout the year, rather than being concentrated
between October and December, as are traditional gift purchases.
The Company's limited experience with the Smokeshop has not afforded the
Company the opportunity to determine seasonality fluctuations for that
segment of its business. However, the Company estimates a slight increase in
fourth quarter sales due to traditional gift purchasing. Otherwise, the
Company estimates a steady revenue flow from month to month.
Data Processing
The Company currently does not have any data processing equipment. It
currently relies upon Kids Stuff to provide data processing services. The
Company is allocated its portion of data processing costs. See "Certain
Transactions."
52
<PAGE>
Competition
The Company believes that there are currently approximately 1,000 to
1,500 full line smoke shops in the United States. While certain retail smoke
shops have adopted catalogs and mail order techniques as a method for
creating additional revenue, the Company believes that the number of
retailers involved in this area of distribution to be relatively small in
number. The Company has identified three companies that are involved in mail
order as a primary method of sales and distribution, and believes that this
constitutes the Company's primary current mail order competition. The three
identified competitors, which include 800 JR Cigar, Thompson's Cigar and Fink
are all mail order cigar businesses that are substantially larger than the
Smokeshop. Management believes that the largest competitor in the mail order
cigar business is 800 JR Cigar. Competition in all aspects of the Company's
business is intense with many competitors having more experience and greater
financial resources than the Company. No assurances can be given that the
Company will be able to successfully compete in all aspects of its business
in the future.
Tobacco Industry - Government Regulations
The tobacco industry is subject to regulation in the United States at
the federal, state and local levels, and the recent trend is toward
increasing regulation. A variety of bills relating to tobacco issues have
been recently introduced in the United States Congress, including bills that,
if passed, would: (i) curtail the advertising and promotion of all tobacco
products and restrict or eliminate the deductibility of such advertising
expenses; (ii) increase labeling requirements on tobacco products to include,
among other things, addiction warnings and lists of additives and toxins;
(iii) modify federal preemption of state laws to allow state courts to hold
tobacco manufacturers liable under common law or state statutes; (iv) shift
regulatory control of tobacco products at the federal level from the United
States Federal Trade Commission (the "FTC") to the United States Food and
Drug Administration (the "FDA") and require the tobacco industry to fund the
FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the access
to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with
tobacco related diseases. Although hearings have been held on certain of
these proposals, to date, none of such proposals have been passed by
Congress. Future enactment of such proposals or similar bills may have a
material adverse effect on the Company's business, results of operations and
financial condition.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and
smokeless tobacco products are drug delivery devices used for the delivery of
nicotine. Although certain legal challenges to the FDA's determination are
pending, there can be no assurance that such determination will not be
upheld, nor that in the future, the FDA will not prevail in an attempt to
extend such
53
<PAGE>
jurisdiction to cigars. In addition, a majority of states restrict or
prohibit smoking in certain public places and restrict sale of tobacco
products (including cigars) to minors. Local legislative and regulatory
bodies have increasingly moved to curtail smoking by prohibiting smoking in
certain buildings or areas or by requiring designated "smoking" areas.
Individual establishments such as bars and restaurants have further
prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Further restrictions of a similar nature
could have a material adverse effect on the business, results of operations
and financial condition of the Company. Numerous proposals have also been
considered at the state and local level restricting smoking in certain public
areas.
Federal law has required health warnings on cigarettes
since 1965 and on smokeless tobacco since 1986. Although no federal law
currently requires that cigars carry such warnings, California has enacted
laws requiring that "clear and reasonable" warnings be given to consumers who
are exposed to chemicals determined by the state to cause cancer or
reproductive toxicity, including tobacco smoke and several of its constituent
chemicals. Similar legislation has been introduced in other states. In
addition, effective January 1, 1998, smoking, including cigar smoking, has
been banned by the State of California in all bars, taverns and clubs where
food and alcohol is served. Other legislation recently introduced in
Massachusetts would, if enacted, require warning labels on cigar boxes. The
states of Minnesota and Texas have enacted legislation which require cigar
manufacturers to provide information on the levels of certain substances in
their cigars to these states on an annual basis. There can be no assurance
that such legislation introduced in other states will not be passed in the
future or that other states will not enact similar or more restrictive
legislation. Consideration at both the federal and state level also has been
given to consequences of second hand smoke. There can be no assurance that
regulations relating to second hand smoke will not be adopted or that such
regulations or related litigation would not have a meterial adverse effect on
the Company's business, results of operations and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. Increased publicity
may prompt research studies by various agencies such as the National Cancer
Institute, the American Cancer Society, and others. Such research can, by its
ultimate content, influence additional regulation of cigars by federal,
state, and local regulatory bodies. There can be no assurance that any such
legislation or regulation would not have a material adverse effect on the
Company's business, results of operations and financial condition.
Tobacco Industry Litigation
The tobacco industry has experienced and is experiencing significant
health-related litigation. Private plantiffs in such litigation are seeking
compensatory and, in some cases, punitive damages, for various injuries
claimed to result from the use of tobacco products or exposure to tobacco
smoke, and some of these actions have named cigarette distributors as well as
manufacturers as defendants. Over 40 states have filed lawsuits against the
major United States cigarette manufacturers to recover billions of dollars in
54
<PAGE>
damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorney General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things,
the tobacco companies would pay hundreds of billions of dollars to the
various states; the FDA could regulate nicotine as a "drug" and tobacco
products as "drug delivery devices;" all outdoor advertising, sports event
advertising and advertising on non-tobacco products would be banned and
certain class action lawsuits and punitive damage claims against tobacco
companies would be prohibited. President Clinton recently announced that he
would not support the Proposed Settlement unless significant changes were
incorporated. Therefore, the potential impact of the Proposed Settlement on
the cigar industry in general and the Company in particular is uncertain.
There can be no assurance that similar litigation will not be brought against
cigar manufacturers and distributors. The potential costs to the Company of
defending prolonged litigation and any settlement or successful prosecution
of any health-related litigation could have a material adverse effect on the
Company's business, results of operations and financial condition. The State
of Florida has entered into a separate settlement agreement with major United
States cigarette manufacturers with respect to tobacco products, including
roll-your-own and little cigars. This settlement agreement provides, in part,
for a ban on billboard and transit advertising, significant document
disclosure by the settling cigarette companies, billions of dollars in
settlement payments and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved the
Proposed Settlement will supersede the Mississippi settlement. The recent
increase in the sales of cigars and the publicity of such increases may
increase the probabilty of legal claims.
Product Liability Insurance
There is a possibility that someone could claim personal injury or
property damage resulting from the use of products purchased from the
Company. As a seller of tobacco products, the Company is exposed to potential
liability. Since 1990, the Company's parent, Duncan Hill, has maintained, for
itself and its subsidiaries, product liability insurance. Currently, the
amount of coverage is $1 million per occurrence and $2 million in the
aggregate. The policies are for a period of one year and are currently in
effect through September 17, 1998. Although the Company believes that its
present insurance coverage is sufficient for its current level of business
operations, there is no assurance that such insurance will be sufficient to
cover potential claims, or that adequate, affordable insurance coverage will
be available to the Company in the future. A partially or completely
uninsured successful claim against the Company or a successful claim in
excess of the liability limits or relating to an injury excluded under the
policy could have a material adverse effect on the Company.
55
<PAGE>
Other Regulatory Matters
The Company's business, and the catalog industry in general, is subject
to regulation by a variety of state and federal laws relating to, among other
things, advertising and sales taxes. The sale of beer and wine is regulated
in Ohio by the Ohio Department of Liquor Control which requires the Company
to be licensed in order to sell such products. The Company has applied to the
Ohio Department of Liquor Control for such a license, which application is
currently pending. The Federal Trade Commission regulates
the Company's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which
the Company sells in its catalogs. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
without collecting sales tax. The Company believes that it collects sales in
states where it is required to do so. The Company has no claims or
regulatory matters in process or pending as of the date of this Prospectus.
See "Risk Factors - State Sales Tax."
Patents, Trademarks and Trade Names
The Company owns two patents: one for the Aerosphere Smoking system; and
one for the Carey Magic Inch Smoking System. The Company also owns the
registered trademarks of the Duncan Hill smoking pipe, "Carey" the registered
trade name for the Carey smoking pipe, and "Magic Inch", the registered trade
name of the Carey smoking system. All trademarks and patents are currently
maintained in effect, with the exception of the U.S. patent for the Carey
Magic Inch Smoking System which has expired. See "Risk Factors."
Employees
As of March 20, 1998, the Company has one full-time employee who is the
manager of its retail store, and five additional part-time employees including
Miller. Neither the Company nor Kid Stuff are represented by a union and no
work stoppages have occured.
Properties
The Company's principal offices are located in Canton, Ohio, and are shared
with the Company's parent and Kids Stuff. The facility consists of 5,600 square
feet and is leased by Duncan Hill through September 30, 1998 with options to
renew for a period of two years. The Company's warehouse and distribution center
is currently operated by Kids Stuff. It is located in North Canton, Ohio and
consists of approximately 18,000 square feet, which is leased for a one year
term expiring September 30, 1998. The Company utilizes approximately 5,000
square feet of this building. Currently, all leases are in the name of Duncan
Hill, and the rent is paid by Kids Stuff. The Company currently pays $32,200
per annum to Kids Stuff for the use of the aforementioned facilities and for use
of certain equipment. See "Certain Transactions."
56
<PAGE>
Legal Proceedings
While the Company may become involved in suits, proceedings, or claims in
the ordinary course of business, the Company is not currently a party to any
legal proceedings that the Company believes would have a material adverse effect
on the Company's business, financial condition or results of operations.
MANAGEMENT
Directors and Executive Officers
The names and ages of the directors and executive officers of the Company
are set forth below:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- ------------------
<S> <C> <C>
William L. Miller........... 61 Chairman of the Board of
Directors, Chief Executive Officer,
Principal Financial Officer and
Treasurer
John W. Cobb, Jr............. 56 Director
Peter Stokkebye VI........... 67 Director
</TABLE>
The term of office for each of the Company's directors is one year until
their respective successors are elected and shall qualify. Executive
officers serve at the pleasure of the Board of Directors.
William L. Miller, has been Chairman of the Board of Directors of
the Company and its President and Chief Executive Officer since December 1997.
Previously, he was the sole director and executive officer of Carey from 1984 to
December 1997. Mr. Miller has held identical positions at Kids Stuff, Inc. from
its formation in July 1996 to the present time. Mr. Miller had been a director
of Perfectly Safe, Inc. and its vice President since it was formed by Duncan
Hill in 1990 until July 1996. Mr. Miller is President, Founder and a director
of Duncan Hill. Prior to founding Duncan Hill in 1977, Mr. Miller founded the
MBI Corporation, which designed and developed packaging machinery (1975-78).
Mr. Miller served in executive capacities in the direct marketing industry from
1971 to 1975. He holds a Bachelors Degree. in Mechanical Engineering from
Purdue University and a Masters Degree in Business Administration from Indiana
University.
57
<PAGE>
John W. Cobb, Jr., has been a Director of the Company since December 1997.
Mr. Cobb is a Senior Vice President of Marketing at McGraw-Hill Continuing
Education center in Washington, DC. He has been with McGraw-Hill since 1981.
Previously, he was the Vice President of Marketing and Syndication Sales for
C.B.S., Inc., Columbia House Division in New York (1979-1981) and Vice
President, Direct Mail Marketing/Special Markets for Bell & Howell Consumer
Products Group in Chicago (1969-1979). As a result of his experience, he has
a comprehensive understanding of the direct mail business. Mr. Cobb has
serves as a director of Duncan Hill from 1993 to the present time. Mr. Cobb
holds a Bachelors Degree in Economics, with a Minor in Marketing from Central
College of Iowa and a Masters Degree in Marketing with a Minor in Management
from the University of Iowa Graduate School of Business.
Peter Stokkebye VI, has been a Director of the Company since
December 1997. From 1962 to 1992, he served as the Managing Director
(retired) of Peter Stokkebye International a/s, Denmark. He currently holds
the position of Honorary Chairman. Established in Odense, Denmark, in 1882,
Peter Stokkeybe International a/s manufactures of fine quality smoking
tobaccos and sells premium cigars. This company developed and supplied the
British Prime Minister, Sir Winston Churchill, with his preferred cigar
brand, Santa Maria. Mr. Stokkebye began his career by serving in the Royal
Guard of the late King Fredrick the Ninth of Denmark, and with employment by
various tobacco manufacturers in Denmark, Switzerland and the U.S.A. In
1962, Mr. Stokkebye became Managing Director of Peter Stokkebye International
a/s.
Peter Stokkebye VI is considered by Management to be the only current
outside (independent) director of the Company. Following the completion of
the Offering, the Company will attempt to identify and appoint one other
individual who is not affiliated with the Company or its affiliates as a
director. Since this person has not yet been identified, there can be no
assurance given that the Company will be able to attract a suitable candidate
to serve as a director. If successful, this presently unidentified person
combined with Peter Stokkebye VI, would provide the Company with two
independent directors.
The Underwriter has been granted by the Company the right to
designate one director to serve on the Company's Board of Directors for a
period of three years from the date of this Prospectus. As of the date
hereof, no such person has been designated. Upon the appointment of one
additional unaffiliated and outside director, the Board of Directors intends
to establish a Compensation Committee and an Audit Committee. The Audit
Committee, which will consist of at least a majority of outside directors who
are not affiliated with the Company, will among other things, make
recommendations to the Board of Directors regarding the independent auditors
for the Company, approve the scope of the annual audit activities of the
independent auditors and review audit results and have general responsibility
for all auditing related matters. The Compensation Committee will consist
entirely of outside directors who are not affiliated with the Company, Kids
Stuff or Duncan Hill. The Compensation Committee will review and recommend
to the Board of Directors the compensation structure for the Company's
officers and other management
58
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personnel, including salary rates, participation in incentive compensation and
benefit plans, fringe benefits, non-cash perquisites and other forms of
compensation.
59
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid to the named
Chief Executive Officer for the fiscal years ended December 31, 1997, 1996 and
1995. During 1997, the Company did not have any other executive officers.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ------------------------------------------------------------- ----------------------------- ---------
(A) (B) (C) (D) (E) (G)
NAME OTHER (F) NUMBER (H)
AND ANNUAL RESTRICTED OF LTIP
PRINCIPAL COMPENSATION STOCK AWARD(S) OPTIONS / PAYOUTS
POSITION YEAR SALARY($) BONUS ($) ($) ($) WARRANTS ($)
- ----------------------- --------- ---------- ------------- ----------------- --------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
William Miller,........ 1997 28,167 -0- -0- -0- (3) 400,000(4) -0-
Chief Executive........ 1996 31,000(1) -0- -0- -0- -0- -0-
Officer (2)............ 1995 31,000(1) -0- -0- -0- -0- -0-
<CAPTION>
AN
- -----------------------
(A) (I)
NAME ALL
AND OTHER
PRINCIPAL COMPENSATION
POSITION ($)
- ----------------------- -----------------
<S> <C>
William Miller,........ -0-
Chief Executive........ -0-
Officer (2)............ -0-
</TABLE>
- ------------------------
(See footnotes on following page.)
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<PAGE>
(1) Compensation was paid by Kids Stuff or Duncan Hill, which provided
management and general and administrative services to the Company (and its
predecessor, Carey), and which after Carey's reincorporation in Delaware,
continued to maintain the named Executive Officer on its payroll.
Approximately 20%, 31% and 31% of Miller's compensation paid by Duncan Hill
or Kids Stuff to Miller were expensed to the Company in 1997, 1996 and 1995,
respectively. The table reflects the amount of Mr. Miller's compensation
allocated to the Company. See "The Company and its Parent."
(2) Mr. Miller served as the President of Carey Inc. until its reincorporation
in Delaware after which time he became Chief Executive Officer of the
Company. Since December 1, 1997, Mr. Miller is being paid by the Company for
services rendered to it under his employment contract with the Company. Mr.
Miller also has an employment contract with Duncan Hill and an employment
contract with Kids Stuff for services rendered by him to those companies.
See "Risk Factors-Chief Executive Officer Not Required to Work Full-Time;
Potential Conflict of Interest."
(3) Does not include securities issued to Duncan Hill, a public company
controlled by Mr. Miller. See "Certain Transactions" for a description of
these transactions, which transactions include 1,000,000 shares of the
Company's Common Stock in connection with the reincorporation of the Company
in Delaware, 5,000,000 shares of Series A Preferred Stock issued as a
dividend to Duncan Hill, 1,100,000 shares of Series B Preferred Stock issued
to Duncan Hill in connection with Duncan Hill's assumption of $300,000 of
the Company's indebtedness to Kids Stuff and a dividend to Duncan Hill of
Warrants to purchase 138,000 shares of the Company's Common Stock, which
Warrants upon the completion of the Offering automatically convert into
138,000 Class A Warrants identical to those sold in the Offering.
(4) Includes warrants to purchase 200,000 shares of the Company's Common Stock,
which warrants upon the completion of the Offering automatically convert
into 200,000 Class A warrants identical to those sold in the Offering and
options to purchase 200,000 shares of the Company's Common Stock as
described herein.
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<PAGE>
Options/Warrants Grants Table--The following table provides information with
respect to individual grants of stock options and warrants by the Company during
fiscal 1997 to the Chief Executive Officer named in the preceding summary
compensation table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION> POTENTIAL
REALIZED VALUE AT
ASSUMED ANNUAL
RATES OF STOCK PRICE
APPRECIATION
FOR OPTION/WARRANT
INDIVIDUAL GRANTS TERM(2)
- --------------------------------------------------------------------------------------------------------- --------------------
<CAPTION>
(A) (B) (C) (D) (E) (F) (G)
NUMBER OF % OF TOTAL
SECURITIES OPTIONS/
UNDERLYING WARRANTS
OPTIONS/ GRANTED TO
WARRANTS EMPLOYEES EXERCISE
GRANTED IN FISCAL PRICE EXPIRATION
NAME (#) YEAR (1) ($/SH) DATE 5% ($) 10% ($)
- ----------------------------------------------------- ----------- ------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
William Miller(3).................................... 200,000 100% 6.00 12/01/07 754,600 1,912,400
William Miller(4).................................... 200,000 100% 5.25 (4) 290,000 634,000
</TABLE>
- ------------------------
(1) The % of Total Options/Warrants Granted to Employees in Fiscal Year' is
based upon options/ warrants granted to the Company's employees only and
excludes options/warrants granted to non-employees.
(2) The potential realizable value of each grant of options/warrants assumes
that the market price of the Company's Common Stock appreciates in value
from the date of grant to the end of the option term at annualized rates of
5% and 10%, respectively, after subtracting out the applicable exercise
price.
(3) The exercise price of $6.00 per share may be lowered based upon certain
performance criteria. These possible adjustment provisions have been ignored
for purposes of the table above. See "Employment Agreement."
(4) As of December 1, 1997, the Company granted warrants to purchase 200,000
shares of Common Stock to Miller. While these warrants have a term of five
years and are exercisable at $6.00 per share, these warrants, upon the
completion of the Offering, automatically convert into 200,000 Class A
Warrants. The expiration date of the Class A Warrants is disclosed in
"Description of Securities--Warrants." The information in the table reflects
the conversion of these warrants into Class A Warrants.
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<PAGE>
Aggregated Option/Warrant Exercises and Fiscal Year-End Option/Warrant
Table-The following table provides information with respect to each exercise
of stock options/warrants during fiscal 1997 by the Chief Executive Officer
named in the preceding summary compensation table and the fiscal year-end
value of unexercised options and warrants. Since there is no public market
for the Company's Common Stock at December 31, 1997, the following table
assumes a fiscal year end value of $6.00 per share based upon the initial
public offering price of the Company's Common Stock included in the Units
without any value attributed to the Class A Warrants included in the Units.
AGGREGATED OPTION/WARRANT/EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/WARRANT VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NUMBER OF
SECURITIES
UNDERLYING VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS/WARRANTS IN-THE- MONEY
SHARES AT FY-END (#) OPTIONS/WARRANTS AT
ACQUIRED ON VALUE EXERCISABLE FY-END ($)
EXERCISE REALIZED (1) /UNEXERCISABLE EXERCISABLE/
NAME (#) ($) (1) UNEXERCISABLE (1)
- ------------------------------------------------ --------------- --------------- ---------------- ------------------
<S> <C> <C> <C> <C>
William Miller.................................. -0- -0- 80,000/200,000 0/210,000
</TABLE>
- ------------------------
(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common Stock
underlying the options/warrants and the exercise price of the
options/warrants at exercise or fiscal year end, respectively, assuming the
conversion of outstanding warrants into Class A Warrants.
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INCENTIVE COMPENSATION PLAN
1997 Long-Term Stock Incentive Plan. In November, 1997, the Company's
majority stockholder approved the adoption of the Company's 1997 Long-term
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, the Board of
Directors or a Compensation Committee of the Board of Directors consisting of
not less than three members may grant stock incentives to employees of the
Company pursuant to which a total of 400,000 shares of common stock may be
issued: provided, however, that the maximum amount of Common Stock with respect
to which stock incentives may be granted to any person during any calendar year
shall be 20,000 shares, except for a grant made to a recipient upon the
recipients initial hiring by the Company, in which case the number shall be a
maximum of 40,000 shares. These numbers are subject to adjustment in the event
of a stock split and similar events. Stock incentive grants may be in the form
of options, stock appreciation rights, stock awards or a combination thereof.
Options granted under the Incentive Plan may be either "Incentive stock
options," which qualify for special tax treatment under Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options, which do
not qualify. Incentive stock options may only be granted to persons who are
employees of the Company. Options will expire at such time as the
compensation Committee determines, provided that no stock option may be
exercisable later than ten years from its grant, except that the maximum term
of any incentive stock option granted to a person who owns, directly or
indirectly, 10% or more of the combined voting power of the Company's capital
stock (a " 10% Shareholder") shall be five years. If an optionee ceases to be
an employee by reason of death, incapacity of retirement, the option shall
terminate fifteen months after the optionee ceases to be an employee. If an
optionee ceases to be an employee because of resignation with the consent of
the compensation committee, the option will terminate three months after the
optionee ceases to be an employee. If an optionee ceases to be an employee or
director for any other reason, the option will expire thirty days after the
optionee ceases to be an employee.
The option price per share is determined by the Compensation Committee,
except for incentive stock options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less
than 110% of such fair market value if the optionee is a 10% shareholder.
Payment of the exercise price may be made in cash, or unless otherwise
provided by the Compensation Committee in shares of Common Stock delivered to
the Company by the optionee or by withholding of shares issuable upon
exercise of the option or in a combination thereof. Each Option shall be
exercisable in full or in part not less than six months after the date the
Option is granted, or may become exercisable in one or more installments at
such later time or times as the Committee shall determine. In the event of a
"change in control" as defined under the Incentive Plan, generally any stock
incentives which have been outstanding for at least six months shall be
immediately exercisable. Each option shall be exercised in full or in part.
Options are not transferable other than by will or the laws of descent and
distribution, and may be exercised during the life of the employee or
director only by him or her. No Incentive Stock Options may be granted under
the Incentive Plan after November 8, 2007.
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<PAGE>
However, any options outstanding on November 8, 2007 will remain in effect
'in accordance with their terms.
The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation committee, provided, however, that such expiration date shall not
be later than ten years from the date of the grant. SARS are not transferable
other than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee" cessation of employment or
directorship, as pertains to options, discussed above.
The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the committee may determine. All shares of
Common Stock subject to a stock award will be valued at not less than 100% of
the fair market value of such shares on the date the stock award is granted.
The number of shares of Common stock which may be granted as a stock award in
any calendar year may not exceed 80,000.
The Incentive Plan will be administered by the compensation Committee,
which has the authority to prescribe, amend and rescind rules and regulations
relating to the Plan, to accelerate the exercise date of any option, to
interpret the Plan and to make all necessary determinations in administering
the Plan.
The Incentive Plan will remain in effect until such time as it is terminated
by the Board of Directors. The Incentive Plan may be amended by the Board of
Directors upon the recommendation of the Compensation Committee, except that,
without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to issuance under the Plan: change the class of persons
eligible to participate under the Plan: withdraw the administration of the Plan
from the Compensation Committee, or, to permit any option to be exercised more
than ten years after the date it was granted. As of the date of the Prospectus,
the Compensation Committee has yet to be formed, and accordingly, no stock
incentives have been granted under the Incentive Plan.
EMPLOYMENT AGREEMENT
Pursuant to an employment agreement dated as of December 1, 1997, the
Company employed William Miller ("Miller") as its Chairman of the Board and
Chief Executive Officer over a term commencing on December 1, 1997 and
expiring on December 31, 2002. The agreement provides for the following
compensation: (i) a base annual salary of $50,000 for 1998 (and each year
thereafter) subject to increase to at least $100,000 for the beginning of the
following fiscal year and the remainder of the term should the Company's
gross revenues exceed $5,000,000 for the prior year; (ii) a cash bonus pool
for key management personnel
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<PAGE>
administered by the Board of Directors or a Compensation Committee under
which a cash bonus will be paid to Miller in an amount ranging from 0% to 50%
of Miller's prior year's base salary; (iii) five-year warrants to purchase
200,000 shares of the Company's Common Stock at an exercise price of $6.00
per share, provided, however, that such warrants upon the completion of the
Offering automatically convert into 200,000 Class A Warrants identical to
those sold to the public ; (iv) in the event the Company engages in any
interim financing in order to raise capital for any venture, subsidiary
acquisition or similar transaction, Miller shall have the option to
participate in, or match the terms of, any such interim financing such that
the terms offered to Miller are the same or similar to those terms offered to
such non-affiliated third party, and Miller is given the opportunity to
participate up to an amount equal to the amount of financing provided by any
third party (it being noted that Miller elected not to participate in the
$200,000 bridge financing); and (v) ten-year options to purchase 200,000
shares of the Company's Common Stock. Options to purchase 80,000 shares are
vested and are currently exercisable. The remaining options become
exercisable as to an additional 40,000 shares on each of January 1, 1999,
January 1, 2000 and January 1, 2001. The initial exercise price of the
options shall be $6.00 per share subject to adjustment as set forth below.
The exercise price for vested options may be decreased if (a) the Company
meets certain performance goals, and (b) Miller timely elects to "lock-in" a
lower exercise price with respect to his vested options. The exercise price
for vested options may be reduced by $1.00 per share for each $200,000 of
pre-tax net income of the Company for the prior fiscal year. The Company
shall report to Miller, promptly upon audited financial statements for the
prior fiscal year becoming available, for pre-tax net income of the Company
for that year. Miller shall have thirty (30) days in which to decide, with
respect to his vested options for which an alternative exercise price has not
previously been locked-in, whether to adjust the exercise price of such
vested options based upon the pre-tax income of the Company for the prior
year.
Miller's employment agreement provides for indemnification to the full
extent permitted by law. Provided Miller beneficially owns less than 50% of
the Company's then outstanding voting stock, Miller is entitled to terminate
the agreement on 30 days' prior written notice upon the incurrence of one of
the following events: (a) the failure of the Company to re-reelect him as
Chief Executive Officer; (b) a material change in his responsibilities,
functions or duties; (c) a material breach of the agreement by the Company;
or (d) the liquidation or dissolution, or consolidation, merger or other
business combination of the Company, or transfer of all or substantially all
of the Company' assets unless such consolidation, merger, or business
combination does not adversely affect Miller's position or the dignity or
responsibilities of Miller. The employment agreement can be terminated by the
Company at any time for cause (as defined in the agreement) on 30 days' prior
written notice. In the event that the agreement is terminated by the Company
without cause or by Miller (as described below) due to a material change in
his responsibilities, functions or duties, the Company shall pay Miller a
lump sum on the date of termination as severance pay an amount derived by
multiplying the factor 2.99 by the sum of Miller's salary and bonus paid in
the year prior to the year of termination. In the event the agreement expires
and Miller is not re-hired as Chairman of the Board and Chief Executive
Officer of the Company on terms mutually acceptable to the parties, the
Company shall pay in a lump sum on the date
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<PAGE>
of termination severance compensation to Miller in an amount equal to
Miller's salary and bonus paid in the year ending December 31, 2002.
In the event that (i) any person other than Miller, Jeanne E. Miller
(Miller's wife), Duncan Hill or their affiliates by any means of purchase or
acquisition becomes the beneficial owner of more than 50% of the Company's
outstanding Common Stock or (ii) the Company enters into an agreement of
reorganization, consolidation or merger of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation or an agreement to sell all or substantially all of the assets of
the Company, then all of Miller options to purchase Common Stock of the
Company outstanding at the time of the event and which were granted six
months or more prior to the event, shall immediately become exercisable in
full. Thereafter, upon the written election of Miller given within 180 days
of the event, the Company shall repurchase for cash all or any part of the
options as specified in the written election at a price per share equal to
the difference in the fair market value of the Company's Common Stock on the
date of the event and the option exercise price per share.
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Limitation of Liability and Indemnification Matters
The Company's Certificate of Incorporation contains a provision
eliminating the personal monetary liability of directors to the extent
allowed under the General Corporation Law of the State of Delaware. Under the
provision, a stockholder is able to prosecute an action against a director
for monetary damages only if he can show a breach of the duty of loyalty, a
failure to act in good faith, intentional misconduct, a knowing violation of
law, an improper personal benefit or an illegal dividend or stock repurchase,
as referred to in the provision, and not "negligence" or "gross negligence"
in satisfying his duty of care. In addition, the provision applies only to
claims against a director arising out of his role as a director or not, if he
is also an officer, his role as an officer or in any other capacity or to his
responsibilities under any other law, such as the federal securities laws. In
addition, the Company's Bylaws provide that the Company will indemnify its
directors, officers, employees and other agents to the fullest extent
permitted by Delaware law. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and
controlling persons of the Company pursuant to the foregoing provisions, or
otherwise, the Company has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
DIRECTORS COMPENSATION
The Company intends to pay its directors who are not also employees
of the Company $500 for each meeting attended and will reimburse such
directors for travel and other expenses incurred by them in connection with
attending Board of Directors meetings. Miller received options and other
compensation pursuant to his employment contract as discussed under
"Employment Contract." In December 1997, the Company granted options to
purchase 30,000 shares to each of Messrs. Cobb and Stokkebye. These options
are almost identical to the options given to Miller and described under
"Employment Contract" except for the date of grant and number of options
granted.
POTENTIAL CONFLICTS OF INTEREST
Miller is a co-founder of the Company's parent, Duncan Hill. See "The
Company and its Parent." Miller is currently the President of Duncan Hill, as
well as Chairman of the Board of Directors and Chief Executive Officer of Kids
Stuff and the Company. Miller's employment agreement with the Company provides
that he shall be permitted to devote such time to managing Duncan Hill and Kids
Stuff as he deems appropriate. Accordingly, Miller will not be devoting his
full-time attention to managing the operations of the Company. Thus, conflicts
of interest could potentially develop (i) to the extent that Miller is not able
to devote his full-time and attention to a matter that would otherwise require
the full-time and attention of a business' chief executive officer, (ii)
involving competition for business opportunities, and (iii) involving
transactions between the Company and its affiliated companies. The Company has
not adopted any procedure for dealing with such conflicts of interest, except
that the Company's Board of Directors has adopted a policy
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<PAGE>
that all new transactions between the Company and Duncan Hill, Kids Stuff or
any other affiliated company must be approved by at least a majority of the
Company's disinterested directors. Currently the Company has only one
disinterested director and Duncan Hill and Miller control the election of the
directors including the disinterested directors.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth as of the date of this Prospectus certain
information with respect to the beneficial ownership of Common Stock by each
person or entity known by the Company to be the beneficial owner of 5% or
more of such shares, each officer and director of the Company, and all
officers and directors of the Company as a group. Beneficial ownership as
reported in the table above has been determined in accordance with Rule 13d-3
of the Exchange Act. Accordingly, except as noted, all of the Company's
securities over which the officers and directors and nominees named, or as a
group, directly or indirectly have, or share voting or investment power, have
been deemed beneficially owned. The table and notes thereto do not reflect
beneficial ownership of Class A Warrants and shares of Preferred Stock held
by Duncan Hill and/or Miller which ownership is described below the table and
accompanying footnotes thereto.
<TABLE>
<CAPTION>
PERCENTAGE
------------------------
<S> <C> <C> <C> <C> <C>
SHARES OF SHARES OF
COMMON COMMON
STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED NUMBER OF OWNED BEFORE AFTER
BEFORE SHARES AFTER OFFERING OFFERING
NAME AND ADDRESS (1) OFFERING OFFERED OFFERING (2) (2)
- ------------------------------------------------------- ----------- ----------- ----------- ----------- -----------
Duncan Hill (3)(6)..................................... 1,000,000 69,000(4) 931,000 100.0 50.1
William L. Miller (5)(6)............................... 80,000 -0- 80,000 7.4 4.1
John W. Cobb (7)....................................... 7,500 -0- 7,500 * *
Peter Stokkebye VI (7)................................. 7,500 -0- 7,500 * *
All three officers and directors and Duncan Hill as a
group)............................................... 1,095,000 69,000 1,026,000 100.0 52.5
</TABLE>
- ------------------------
* Represents less than 1% of the outstanding shares.
(1) All addresses for Duncan Hill, Miller, John Cobb and Peter
Stokkebye are c/o The Havana Group, Inc. 4450 Belden Village Street, N.W.,
Suite 406, Canton, Ohio 44718.
(2) Calculated based upon 1,000,000 shares of Common Stock outstanding before
the Offering and 1,860,000 shares outstanding after the Offering without
giving effect to the possible exercise of the Over-Allotment Option. The
Shares issued after the Offering include the 400,000 shares to be issued to
the Bridge Lender.
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(3) Miller may be deemed to beneficially own all Duncan Hill's shares based
upon his 64% controlling interest in Duncan Hill's shares of Common
Stock. Duncan Hill also owns 5,000,000 shares of Series A Preferred Stock
and 1,100,000 shares of Series B Preferred Stock which have the same
voting rights as the Common Stock. This would bring the number of shares
of Common Stock beneficially owned for voting purposes by Duncan Hill
before the Offering to 7,100,000 representing, 100% of the voting capital
stock and after the Offering up to 7,031,000, representing 88.3% of the
voting capital stock assuming the Underwriter's Over-Allotment Option is
exercised in full.
(4) Represents minimum number of shares to be offered pursuant to the
Underwriters' Over-Allotment Option and/or pursuant to the Concurrent
Offering by Duncan Hill as a Selling Unit Holder.
(5) Miller has a ten-year option to purchase 200,000 shares of Common Stock as
described under "Executive Compensation--Employment Contracts. The table
includes only 80,000 of the 200,000 shares represented by the options and
beneficially owned by him as of the date of this Prospectus.
(6) The shares of Common Stock owned by Miller and Duncan Hill are shown
separately even though Miller controls Duncan Hill. If shown together,
Duncan Hill and Miller beneficially own 1,080,000 shares (100%) of the
outstanding Common Stock before the Offering and 1,011,000 shares (52.1%)
after the Offering assuming the Over-Allotment Option is exercised in full
by the Underwriters.
(7) Includes the vested portion of the options granted to him. Does not
include options to purchase an additional 22,500 shares.
The foregoing table does not reflect any ownership by the Bridge Lender
since shares of Common Stock issuable upon exercise of the Class A Warrants
are not deemed to be beneficially owned by it as of the date of this
Prospectus. The Bridge Lender shall receive 400,000 shares of Common Stock
and 1,400,000 Class A Warrants upon the completion of the Offering by virtue
of the automatic conversion of a Convertible Note into those securities. The
400,000 shares of Common Stock and 1,400,000 Class A Warrants held by the
Bridge Lender have been registered for resale in the Concurrent Offering. See
"Selling Security Holders."
Duncan Hill owns 5,000,000 shares of Series A Preferred Stock representing
100% of the outstanding Series A Preferred Stock. The Series A Preferred Stock
has the same voting privileges as the Common Stock. Duncan Hill owns 1,100,000
shares of Series B Preferred Stock representing 100% of the outstanding Series B
Preferred Stock. The Series B Preferred Stock has the same voting privileges as
the Common Stock and may in the future become convertible into Common Stock if
certain criteria are met by the Company. The Series A and Series B Preferred
Stock have the right to vote as a separate class from the Common Stock in
such cases where the rights and privileges of the Preferred Stock would be
adversely effected by a change in the capitalization of the Company.
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<PAGE>
The following table sets forth the number of Class A Warrants to be owned
by the Company's officers, directors and the Bridge Lender after the Offering
and the percentages of ownership of outstanding Class A Warrants assuming the
Over-Allotment Option is exercised in full.
<TABLE>
<CAPTION>
NAME AMOUNT PERCENTAGE AFTER THE OFFERING
- ------------------------------------------------------------------------- ---------- -----------------------------
<S> <C> <C>
Duncan Hill (1).......................................................... -0- -0-
William Miller (2)....................................................... 200,000 6.4
John Cobb................................................................ -0- -0-
Peter Stokkebye VI....................................................... -0- -0-
Linda Gallenberger, Trustee ARO Trust #1, 1970 Trust (3)................. 1,400,000 44.9
</TABLE>
- ------------------------
(1) If the Over-Allotment Option is not exercised, Duncan Hill would own 138,000
Class A Warrants after the Offering representing 4.4% of the outstanding
Class A Warrants. Duncan Hill's 138,000 Class A Warrants and the underlying
shares of Common Stock are registered for sale in the Concurrent Offering.
See "Selling Security Holders."
(2) Miller's 200,000 Class A Warrants are registered for sale in the Concurrent
Offering. See "Selling Security Holders."
(3) ARO Trust #1, 1970 Trust's 1,400,000 Class A Warrants are registered for
sale in the Concurrent Offering. See "Selling Security Holders."
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<PAGE>
CERTAIN TRANSACTIONS
(i) Over the last five years the Company's operations have been
financed by Duncan Hill (and by Kids Stuff in 1997 and 1998) providing
certain administrative and other services for the benefit of the Company and
charging the Company for these services as described below. On December 31,
1996, Carey entered into an agreement with United Bank to pledge all of its
assets as collateral along with the assets of Duncan Hill to guarantee an
$800,000 revolving bank line of credit in the name of Kids Stuff. The bank
line of credit is for an open term, payable on demand. The repayment of this
credit facility is guaranteed by both the Company and Miller. This
transaction occurred at a time when the Company was a wholly-owned subsidiary
of Duncan Hill and the Company did not intend to undertake a public offering
of its securities. The Company's guarantee was without consideration and is
irrevocable without the line-of-credit being paid in full. Although United
Bank has been requested by Kids Stuff to waive the Company's guarantee, no
assurance can be given that United Bank will honor such request.
Prior to 1997, a fulfillment and administrative services of the Company
were performed for the Company by Duncan Hill which also provided similar
services to its subsidiary, Kids Stuff. Fulfillment services included order
taking, order processing, customer service, warehouse packing and delivery,
telephone contracts and shipping contracts. Fulfillment services were
charged to the Company and Kids Stuff based on the actual cost. The amount of
these charges was $295,558 during 1996. Administrative services included
wages and salaries of officers, accounting, purchasing, executive and
creative/marketing personnel. It also included, all leases, contracts,
equipment rentals and purchases, audit, legal, data processing, insurance and
building rent and maintenance. The administrative costs were allocated by
Duncan Hill to the Company and Kids Stuff based upon the percentage of assets
for each operating subsidiary to the total assets for all operating
subsidiaries. The amount charged to the Company during 1996 was $360,873.
The percentages for 1996 were 31% to the Company and 69% to Kids Stuff.
During 1997, all administrative and fulfillment services were performed
or paid by Kids Stuff on behalf of the Company. All fulfillment services
were contracted and paid by Kids Stuff and charged to the Company based on
the actual cost. The charges to the Company were $218,632 for 1997. All
administrative costs were allocated between the Company and Kids Stuff based
upon the percentage of assets for each respective operating company to the
total assets for both operating companies with 33% charged to the Company for
the period January 1, 1997 through June 30, 1997 and 21% charged to the
Company for the period July 1, 1997 through December 31, 1997. The total
charges to the Company from Kids Stuff were
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<PAGE>
$255,120. Duncan Hill also incurred certain other costs that were allocated
to the Company and Kids Stuff based on the same method and percentages as
described above.
These costs were incurred and billed in the name of Duncan and include
such items as legal fees, outside accounting fees and insurance expense.
Though Duncan was billed for the items the COmpany partially benefited from
the services received. The charge to the Company was $65,4764.
Effective January 1, 1998, the Company has an agreement with Kids Stuff
whereby Kids Stuff provides administrative functions to the Company at an
annual cost of $206,100 based upon the following: $34,000 for accounting and
payroll services, $51,600 for administration and human resource management,
$34,900 for data processing, $32,200 for office equipment and facilities use,
$38,100 for merchandising and marketing services and $15,300 for purchasing
services. Kids Stuff is also providing fulfillment services to the Company
at a cost of $2.40 per order processed. The Company has calculated these fees
based on actual 1997 costs, and it is Management's belief that these fees
would represent actual costs should the Company undertake to provide these
services itself. The Company is also obligated to pay Kids Stuff an amount
equal to 5% of the Company's 1998 pre-tax profits as additional consideration
for Kids Stuff providing the Company with administrative and fulfillment
services. In addition to the above, the Company also expects to incur
additional administrative costs such as legal, accounting, depreciation and
amortization and tax expenses which costs will be incurred by and paid for
directly by the Company.
Until August, 1997, Duncan Hill received all revenues and deposited
these funds in its own account for the benefit of the Company and made
payments against Company charged expenses including, without limitation, any
funds due Duncan Hill and Kids Stuff.
Effective September 1997, the Company obtained its own banking accounts,
whereby the Company manages all deposits and payments. the Company will
manage its own functions with the exception of those discussed above, for
which the Company will make payment to Kids Stuff for services provided by
Kids Stuff. At January 1, 1998, the Company owed a net of $173,752 to Kids
Stuff and is owed a net which consists of charges for fulfilment and
administrative services of $473,752 less $300,000 of affiliate indebtedness
assumed by Duncan Hill relating to the sale of the Company's Series B
Preferred Stock. See "(iv)" below. The Company is also owed a net of $43,860
from Duncan Hill which consists of balances since 1984 totaling $12,312,833
owned by Duncan Hill for payments from the Company in the form of revenue
deposits as mentioned above, $8,455,066 in payments made on behalf of the
Company by Duncan Hill for accounts payable and other payments and $3,813,907
owed to Duncan Hill for fulfilment and administrative expenses allocated to
the Company. The Company intends to pay the balance due to Kids Stuff from
cash flow over the next 12 months.
(ii) Pursuant to an employment agreement, the Company granted Miller
five year Warrants to purchase 200,000 shares of the Company's Common Stock
in December 1997. Upon the completion of the Offering, the aforesaid
Warrants which are currently exercisable at $6.00 per share automatically
convert into Class A Warrants identical to those sold in the Offering. See
"Selling Security Holders."
(iii) On December 8 , 1997, the Company declared a stock dividend of
5,000,000 shares of its Series A Preferred Stock and five year warrants to
purchase 138,000 shares of the Company's Common Stock to Duncan Hill, the
Company's sole common stockholder prior to the Offering. Upon the completion
of the Offering, the aforesaid warrants which are currently exercisable at
$6.00 per share automatically convert into Class A Warrants identical to
those sold in the Offering. See "Selling Security Holders."
(iv) On December 8, 1997, the Company sold 1,100,000 shares of its
Series B Preferred Stock to Duncan Hill in exchange for Duncan Hill's
assumption of $300,000 of indebtedness owing to an affiliate.
The holder of each share of Series B Preferred Stock will be entitled to
receive, when, as and if declared by the Board of Directors of the Company,
out of funds legally available therefor, non-cumulative quarterly cash
dividends at the rate of $.025 per share, quarterly on March 31, June 30,
September 30 and December 31 commencing with March 31, 1998. As of the date
of this Prospectus, all issued and outstanding shares of Series B Preferred
Stock are owned by Duncan Hill. See "Description of Securities."
All the aforesaid transactions occurred at a time when the Company was a
sole shareholder of Duncan Hill. All future transactions between the
Company, Duncan Hill and Kids Stuff must be approved by a majority of the
Company's disinterested directors. See "Possible Conflicts of Interest."
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<PAGE>
DESCRIPTION OF SECURITIES
Units
The securities that are offered hereby are being offered and will be
sold only in units ("Units"). Each Unit consists of one share of Common
Stock, $.001 par value (the "Common Stock") and two Class A Warrants. The
Common Stock and the Class A Warrants are not detachable or separately
transferable until the earlier of (i) ________, 1998 (six months from the
date of this Prospectus) or (ii) the date selected by the Representative in
writing for separation (the "Separation Date"). After the Separation Date,
the Common Stock and Class A Warrants will be detachable and may trade
separately.
Common Stock
The Company has 25,000,000 shares of authorized Common Stock, $.001 par
value. Immediately prior to the Offering, 1,000,000 shares of Common Stock
were issued and outstanding, all of which are owned by Duncan Hill.
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Stockholders do
not have cumulative voting rights. Subject to preferences that may be
applicable to any then outstanding Preferred Stock, holders of Common Stock
are entitled to receive ratably such dividends as may be declared from time
to time by the Board of Directors out of funds legally available therefor.
See "Dividend Policy." In the event of a dissolution, liquidation or
winding-up of the Company, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the
liquidation preference of any then outstanding Preferred Stock. Holders of
Common Stock have no right to convert their Common Stock into any other
securities. The Common Stock has no preemptive or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Common
Stock. All outstanding shares of Common Stock are, and the Common Stock to
be outstanding upon completion of the Offering will be, duly authorized,
validly issued, fully paid and nonassessable.
Preferred Stock
The Certificate of Incorporation provides the Company's Board of
Directors with the authority, without further action by the stockholders, to
issue up to 10,000,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preferences and the number of shares constituting any series or
the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have
the effect of delaying, deferring or preventing a change in control of the
Company. The Company has no present plans to issue any shares of Preferred
Stock beyond the presently outstanding Series A Preferred Stock and Series B
Preferred Stock discussed below.
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Series A Preferred Stock
The Company has issued and outstanding 5,000,000 shares of Series A
Preferred Stock, $.001 par value. The holders of the Series A Preferred
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of the common stockholders with the Series A Preferred
Stock voting as a class with the Common Stock and Series B Preferred Stock
and the right to vote as a separate class only where required by Delaware
law. As of the date of this Prospectus, all of the issued and outstanding
shares of the Series A Preferred Stock are held by Duncan Hill. The Series A
Preferred Stock, Series B Preferred Stock (described below) and the Common
Stock owned by Duncan Hill will enable it and Miller to maintain control of
the Company subsequent to the completion of the Offering. See "Risk Factors
- - Control by Parent and Parent's Controlling Stockholders." The Series A
Preferred Stock is not subject to redemption and has no conversion rights or
rights to participate in dividend payments. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, each share of Series A Preferred Stock has a liquidation preference
of $.001 per share.
Series B Convertible Preferred Shares
The Company has 1,100,000 shares of Series B Preferred Stock, $.001 par
value. The holders of Series B Preferred Stock are entitled to one vote on
all matters submitted to a vote of common stockholders with the Series B
Preferred Stock voting as a class with the Common Stock and Series A
Preferred Stock and the right to vote as a separate class only where required
by Delaware law. The holder of each share of Series B Preferred Stock will
be entitled to receive, when, as and if declared by the Board of Directors of
the Company, out of funds legally available therefor, non-cumulative quarterly
cash dividends at the rate of $.025 per share, quarterly on March 31, June
30, September 30 and December 31 commencing with March 31, 1998. As of the
date of this Prospectus, all issued and outstanding shares of Series B
Preferred Stock are owned by Duncan Hill. Each share of Series B Preferred
Stock is convertible at the option of the holder of the Series B Preferred
Stock into one share of Common Stock at any time after the Company has
pre-tax earnings of at least $500,000 in any calendar year. The Series B
Preferred Stock is not subject to redemption rights. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company, each share of Series B Preferred Stock has a
liquidation preference of $.001 per share plus all accumulated and unpaid
dividends.
Outstanding Warrants
The Company currently has outstanding Warrants to purchase 338,000
shares of its Common Stock at an exercise price of $6.00 per share over a
term of five years expiring in December 2002. These Warrants which are owned
by Duncan Hill/Miller upon completion of the Offering automatically convert
into 338,000 Class A Warrants identical to those sold in the Offering. See
"Certain Transactions."
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<PAGE>
Class A Warrants
The Class A Warrants will be issued pursuant to the terms of a Warrant
Agreement dated as of the date of this Prospectus between the Company and
Harris Trust Company of New York (the "Warrant Agent") named below, a copy of
which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part. During the exercise period commencing on the
Separation Date and expiring _______, 2003 (the "Expiration Date"), each
Class A Warrant will entitle the registered holder to purchase one share of
Common Stock at an exercise price of $5.25 per share.
The Company may redeem the Class A Warrants at a price of $.01 per
Warrant at any time after they become exercisable and prior to their
expiration by giving not less than 30 days' written notice mailed to the
record holders if the closing bid price of the Common Stock has been at least
$10.50 on each of the 20 consecutive trading days ending on the 15th day
prior to the date on which the notice of redemption is given.
The Class A Warrants will expire at 5:00 p.m., New York time, on the
Expiration Date. In the event a holder of Class A Warrants fails to exercise
the Class A Warrants prior to their expiration, the Class A Warrants will
expire and the holder thereof will have no further rights with respect to the
Class A Warrants. A holder of Class A Warrants will not have any rights,
privileges or liabilities as a stockholder of the Company. In the event of
the liquidation, dissolution or winding up of the Company, holders of the
Class A Warrants are not entitled to participate in the distribution of the
Company's assets.
The exercise price of the Class A Warrants and the number of shares
issuable upon exercise of the Class A Warrants will be subject to adjustment
to protect against dilution in the event of stock dividends, stock splits,
combinations, subdivisions and reclassifications. No assurance can be given
that the market price of the Company's Common Stock will exceed the exercise
price of the Class A Warrants at any time during the exercise period. Class
A Warrants may be exercised by surrendering to the Warrant Agent the Class A
Warrants and the payment of the exercise price in United States funds by cash
or certified or bank check. No fractional shares of Common Stock will be
issued in connection with the exercise of Class A Warrants. Upon exercise,
the Company will pay to the holder the value of any such fractional shares
based upon the market value of the Common Stock at such time. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock for issuance to permit exercise of the Class A Warrants.
Purchasers of the Class A Warrants will have the right to exercise the
Class A Warrants to purchase shares of Common Stock only if a current
prospectus relating to such shares is then in effect and only if the shares
are qualified for sale under the securities laws of the jurisdictions in
which the various holders of the Class A Warrants reside. The Company has
undertaken to maintain the effectiveness of the Registration Statement of
which this Prospectus is a part or to file and maintain the effectiveness of
another registration statement so as to permit the purchase of the Common
Stock underlying the Class A Warrants, but there can be no assurance that the
Company will be
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<PAGE>
able to do so. The Class A Warrants may be deprived of any value if this
Prospectus or another prospectus covering the shares issuable upon the
exercise thereof is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the jurisdictions in which the
holders of the Class A Warrants reside.
The Company may find it more difficult to raise capital if it should be
needed for the business of the Company while the Class A Warrants are
outstanding. At any time when the holders of Class A Warrants might be
expected to exercise them, the Company would, in all likelihood, be able to
obtain additional capital on terms more favorable than those provided in the
Class A Warrants. See "Risk Factors - Current Prospectus and State Blue Sky
Registration Required to Exercise Class A Warrants."
See "Underwriting" regarding an agreement to pay a solicitation fee to
the Representative if certain conditions are met.
Underwriters' Unit Purchase Option
In connection with the Offering, the Company has agreed to sell to the
Underwriters, for an aggregate purchase price of $46, the Underwriters' Unit
Purchase Option which entitles the holders to purchase 46,000 Units. For a
description of the terms of the Underwriters' Unit Purchase Option, see
"Underwriting."
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Units, Common Stock
and Class A Warrants is Harris Trust Company of New York, 430 Park Avenue,
New York, NY 10022.
UNREGISTERED SHARES ELIGIBLE FOR IMMEDIATE AND FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
1,860,000 shares of Common Stock. Of such shares, 460,000 shares of Common
Stock will be freely transferable without restriction or further
registration under the Securities Act (the "Unrestricted Shares"), other than
any of such shares acquired by persons who are currently "affiliates" of the
Company as defined by Rule 144 under the Act, which will be subject to
limitations under Rule 144 for so long as such persons are affiliates. An
additional 400,000 shares have been registered for resale in the Concurrent
Offering and are freely transferable subject to the holder being able to
deliver a current Prospectus. See "Selling Security Holders."
Duncan Hill beneficially owns 1,000,000 shares of the Company's Common
Stock, 5,000,000 shares of the Company's Series A Preferred Stock, and
1,100,000 shares of the Company's Series B Convertible Preferred Stock. Of
the 1,000,000 shares of Common Stock, 69,000 shares have been registered for
sale pursuant to the Over-Allotment option and to the extent not exercised,
if any, pursuant to the Concurrent Offering. The remaining 931,000 shares of
Common Stock and the aforementioned Preferred Stock held by Duncan Hill (and
options to purchase 260,000 shares held by the three directors of the
Company) are "restricted securities" within the meaning of Rule 144, and may
not be sold in the absence of registration other than in accordance with Rule
144 described below or pursuant to another exemption from regulation under
the Securities Act. These restricted shares
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<PAGE>
are also subject to a 24-month "lock-up" agreement with the Representative.
See "Underwriting."
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including persons who may be deemed to be
"affiliates" of the Company as that term is defined under the Securities Act,
is entitled to sell within any three-month period a number of shares
beneficially owned for at least one year that does not exceed the greater of
(i) one percent of the then-outstanding shares of Common Stock or (ii) the
average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and the availability of current
public information about the Company. However, a person who is not an
affiliate and has beneficially owned such shares for at least two years is
entitled to sell such shares without regard to the volume, manner of sale or
notice requirements.
No predictions can be made as to the effect, if any, that future sales
of shares under Rule 144 or the availability of shares for sale will have on
the then-prevailing market, if any. Sales of substantial amounts of Common
Stock pursuant to Rule 144 or otherwise may adversely affect the
then-prevailing market price of the Units, Common Stock and the Class A
Warrants, should a public trading market for such securities develop.
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<PAGE>
UNDERWRITING
The Underwriters, as set forth below and for whom VTR Capital, Inc. is
the Representative, have agreed, subject to the terms and conditions of the
Underwriting Agreement, to purchase from the Company a total of 460,000 Units
on a "firm commitment" basis. The Underwriting Agreement provides that the
obligations of the Underwriters to purchase the Units are subject to certain
conditions and that the Underwriters are obligated to purchase all of the
460,000 Units, if any are purchased.
Underwriters Number of Units
------------ ---------------
VTR Capital, Inc.
Total 460,000
-------
-------
The Underwriters have advised the Company that they propose to offer the
Units to the public at the offering price set forth on the cover page of this
Prospectus and that they may allow to certain dealers concessions not in
excess of $.60 per Unit. After the initial public offering, the offering
price and discount may be changed. The Underwriters do not intend to sell
any of the Units offered hereby to accounts for which they have discretionary
authority.
Duncan Hill has granted to the Underwriters an option, exercisable
during the 30-day period from the date of this Prospectus, to purchase from
Duncan Hill at the offering price, less the underwriting discount, up to a
maximum of 69,000 additional Units for the sole purpose of covering
over-allotments, if any.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with
Regulation M under the Exchange Act. Over-allotment involves syndicate sales
in excess of the offering size, which creates a syndicate short position.
Stabilizing transactions permit bids to purchase the underlying security so
long as the stabilizing bids do not exceed a specific maximum. Syndicate
covering transactions involve purchases of the Company's securities in the
open market after the distribution has been completed in order to cover
syndicate short positions. Penalty bids permit the Underwriters to reclaim a
selling concession from a syndicate member when the securities originally
sold by such syndicate member are purchased in a syndicate covering
transaction to cover syndicate short positions. Such stabilizing
transactions, syndicate covering transactions and penalty bids may cause the
price of the securities to be higher than they would otherwise be in the
absence of such transactions. These transactions may be effected on the OTC
Electronic Bulletin Board assuming the Company is successful in listing its
securities on such system. See "Risk Factors -Certain Implications of
Trading Over-the-Counter; Penny Stock Regulations."
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as
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<PAGE>
indemnification for liabilities arising under the Securities Act may be
provided to officers, directors or persons controlling the Company, the
Company has been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy and is therefore
unenforceable.
The Underwriters have informed the Company that they do not expect
sales of shares of Common Stock to be made to discretionary accounts to
exceed 2% of the shares of Common Stock offered hereby.
The Company has agreed to pay the Underwriters an expense allowance on a
non-accountable basis equal to 3% of the gross proceeds from the sale of the
Units offered hereby (including the sale of any Units pursuant to the
Underwriters' Over-Allotment Option). The Company also has agreed to pay all
expenses in connection with qualifying the Units offered hereby for sale
under the laws of such states as the Representative may designate, and the
fees, costs and disbursements in connection with registering the Offering
with the NASD, including fees and expenses of counsel retained for such
purposes by the Representative.
The Company has also agreed to sell to the Underwriters, for an
aggregate purchase price of $46, the Underwriters' Unit Purchase Option,
which entitles the holder(s) to purchase up to 46,000 Units at an exercise
price of $9.00 per Unit. The Units are identical to the Units sold to the
public except that the exercise price of Class A Warrants included in the
Units is 150% of the then effective exercise price of the publicly held Class
A Warrants. The Underwriters' Unit Purchase Option is exercisable for four
years commencing one year from the date of the Prospectus. The Underwriters'
Unit Purchase Option may not be assigned, transferred, sold or hypothecated
by the Underwriters until 12 months after the date of this Prospectus, except
to officers or partners of the Underwriters, selling group members and their
officers and partners. Any profits realized by the holders upon the sale of
the Units issuable upon exercise of the Underwriters' Unit Purchase Option
may be deemed to be additional underwriting compensation. The exercise price
and the number of Units underlying the Underwriters' Unit Purchase Option are
subject to adjustment in certain events to prevent dilution. For the life of
the Underwriters' Unit Purchase Option, the holders thereof are given, at a
nominal cost, the opportunity to profit from a rise in the market price of
the Units with a resulting dilution in the interest of other stockholders.
The Company may find it more difficult to raise capital for its business if
the need should arise while the Underwriters' Unit Purchase Option is
outstanding. At any time when the holders of the Underwriters' Unit Purchase
Option might be expected to exercise it, the Company would probably be able
to obtain additional capital on more favorable terms.
The Company has agreed to register, at its expense, under the Securities
Act, on one occasion, the Underwriters' Unit Purchase Option or the
underlying securities covered by the Underwriters' Unit Purchase Option at
the request of the holders of 50% of the Underwriters' Unit Purchase Option.
Such request may be made at any time during a period of four years beginning
one year from the date of this Prospectus. The Company has also agreed to
certain "piggyback" registration rights for the holders of the Underwriters'
Unit Purchase Option or securities issuable upon the exercise of the
Underwriters' Unit Purchase Option. Any exercise of such registration rights
by the Underwriter or the sale of any Units by the holders thereof may be
dilutive to the then present shareholders and may also have an adverse effect
upon either the Company's
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<PAGE>
ability to obtain additional capital, or the market price of the Company's
securities should a public trading market develop.
Commencing 12 months after the date of this Prospectus to the extent not
inconsistent with the guidelines of the NASD and the rules and regulations of
the Commission, the Company has agreed to pay the Representative a warrant
solicitation fee of 5% of the exercise price for each Warrant exercised
(excluding Class A Warrants exercised by the Representative) payable upon the
exercise of such Class A Warrant. However, no compensation will be paid to
the Representative in connection with the exercise of such Class A Warrants
if (a) the market price of the underlying shares of Common Stock is lower
than the exercise price, (b) the Class A Warrants are held in a discretionary
account, (c) the Class A Warrants are exercised in an unsolicited transaction
or (d) the disclosure of such compensation arrangements has not been made in
the documents provided to the customers both as part of the original offering
and at the time of exercise. In addition, unless granted an exemption by the
Commission from Regulation M under the Exchange Act, the Representative will
be prohibited from engaging in any market making activities or solicited
brokerage activities with regard to the Company's securities until the later
of the termination of such solicitation activity or the termination by waiver
or otherwise of any right the Representative may have to receive a fee for
the exercise of the Class A Warrants following such solicitations.
The Company has agreed not to issue, sell, offer to sell or otherwise
dispose of any shares of the Company's Common Stock, or securities
convertible into Common Stock, for a period of twenty-four (24) months from
the date of this Prospectus, without the prior written consent of the
Representative other than issuances of Common Stock by the Company in
connection with the exercise of outstanding options and warrants and up to
50,000 restricted shares to employees and in connection with mergers and
acquisitions, so long as such newly issued shares (other than in connection
with the exercise of outstanding publicly held warrants) can not be resold
prior to the date which is twenty-four (24) months from the date of this
Prospectus.
Duncan Hill and each officer and director of the Company have agreed
not to sell or otherwise transfer any securities of the Company beneficially
owned by them on the date of this Prospectus for a period of 24 months from
the date of this Prospectus, without the prior written consent of the
Representative. However, the foregoing is not applicable to the 69,000 Units
that may be sold by Duncan Hill pursuant to the Over-Allotment Option or the
Concurrent Offering and 200,000 Class A Warrants to be offered by Miller
pursuant to the Concurrent Offering.
The Company has agreed to enter into a two-year consulting agreement
(the "Consulting Agreement") with the Representative. Such agreement
provides that the Representative will render consulting services on
investment banking and other financial matters to be determined by the
Company. Such services will be provided upon dates requested by the Company
and reasonably acceptable to the Representative not to exceed two business
days per month. The services to be provided by the Representative shall
include: assistance in formulating plans and presenting financial reports;
analyzing third party proposals for the provision of additional financing to
the Company; assistance in dealing with brokers and institutions; assistance
in obtaining financial management, technical and advisory services; and,
assistance in obtaining financial and corporate public relations. The
aggregate fee due to the Representative for such consulting services will be
$100,000 and shall be paid in full upon the closing date of the Offering.
The Representative has been granted by the Company the option to
designate one individual to serve on the Company's Board of Directors for a
period of three years from the date of this Prospectus. That individual must
be reasonably satisfactory to the
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<PAGE>
Company's Board of Directors. As of the date hereof, no such person has been
designated. The Company has been advised by the Representative that any
individual appointed by the Representative will not likely be an officer,
director or affiliate of the Representative or any member of the NASD. In
lieu of nominating a director, the Representative may designate a
non-director observer to attend meetings of the Company's Board of Directors
for a period of three years from the date of the Prospectus. Such appointee
or designee shall receive the same compensation as any other non-executive.
If the Company shall within five (5) years from the date of this
Prospectus, enter into any agreement or understanding with any person or
entity introduced by the Representative involving: (i) the sale of all or
substantially all of the assets and properties of the Company; (ii) the
merger or consolidation of the Company (other than a merger or consolidation
effected for the purpose of changing the Company's domicile); or (iii) the
acquisition by the Company of the assets or stock of another business entity,
which agreement or understanding is thereafter consummated, whether or not
during such five (5) year period, the Company, upon such consummation, shall
pay to the Representative an amount equal to the following percentages of the
consideration paid by the Company in connection with such transaction: 5% of
the first $4,000,000 or portion thereof, of such consideration; 4% of the
next $1,000,000 or portion thereof, of such consideration; 3% of the next
$1,000,000 or portion thereof, of such consideration; and 2% of such
consideration in excess of the first $6,000,000 of such consideration. The
fee payable to the Representative will be in the same form of consideration
as that paid by or to the company, as the case may be, in any such
transactions.
Prior to the Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units offered
hereby and the terms of the Class A Warrants, including the exercise price of
the Class A Warrants, were determined by negotiations between the Company and
the Representative and do not necessarily bear any relationship to the
Company's assets, results of operations or other generally accepted criteria
of value. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, include the history of and the
prospects of the industry in which the Company competes, an assessment of the
Company's management, the results of operations of the Company in recent
periods, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
The offering price set forth on the cover page of this Prospectus should
not be considered an indication of the actual value of the Units. Such price
is subject to change as a result of market conditions and other factors and
no assurance can be given that the Units can be resold at the offering price.
The foregoing is a summary of all of the material provisions of the
Underwriting Agreement, Consulting Agreement and Underwriters' Unit Purchase
Option which have been filed as exhibits to the Registration Statement of
which this Prospectus forms a part.
SEC Investigation Involving the Representative.
The Company has been advised by the Representative that the Securities
and Exchange Commission ("SEC") has issued an order directing a private
investigation by the staff of the SEC. Such order empowers the SEC staff to
investigate whether, from June 1995 to the present, the Representative and
certain other persons and/or entities may have engaged in fraudulent acts or
practices in connection with the purchase or sale of securities of certain
other companies in violation of Sections 10(b) and 15(c)(1) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and Section 17(a) of
the Securities Act. These acts or practices include whether the
Representative and certain other brokers or dealers effected transactions or
induced transactions by making untrue statements of material fact and whether
the Representative and certain others have engaged in manipulative, deceptive
or other fraudulent devices. The formal order also concerns whether the
Representative and certain others who have agreed to participate in a
distribution have violated Rule 10b-6 of the Exchange Act by having bid for
or purchased securities for accounts in which it had a beneficial interest or
which is the subject of such distribution. As of March 16, 1998, the
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Representative understands that the SEC investigation is ongoing. The
Representative cannot predict whether this investigation will result in any
type of enforcement action againnst the Representative. See "Risk Factors."
NASD Complaint Against the Representative. The Company has also been
advised by the Representative that during 1996 and 1997, the staff of the
NASD conducted an inquiry into the trading and sales practices of securities
of another company in and around april 1995. In connection with the inquiry,
the NASD staff obtained documents from the Reprersentative and conducted
on-the-record interviews of, among others, the Representative's Chief
Executive Officer, Head Trader and Chief Financial Officer. On February 20,
1998 the NASD Department of Enforcement filed an administrative complaint
against the Representative a principal of the firm and two traders from other
broker-dealers. The complaint alleges that the Representative, acting through
its then president and sole owner, acquired and distributed certain
securities of another corporation without registration under Section 5 of the
Securities Act representing approximately 28% of the available float in the
security in purported violation of NASD Rule 2110. The complaint futher
alleges that at the same time the Representative and its then president
continued to make a market in the corporation's stock in purported violation
of Section 10(b) of the Exchange Act and Rule 10b-6 thereunder and NASD Rules
2110 and 2120. Moreover, the complaint alleges that the Representative and
its then president caused the aforementioned alleged unregistered
distribution without filing the necessary documents with the NASD's Corporate
Financing Department and failed to disclose to customers alleged unfair
excessive and unreasonable compensation received from the distribution in
violation of NASD Rules 2110 and 2710. In addition, the complaint alleged
that the respondents fraudulently manipulated the market for the
corporation's common stock by arbitrarily increasing the share price and by
artificially inflating the reported trade volume through "wash" and "matched"
or circular trading so as to create the appearance of an active market in the
stock in purported violation of Section 10(b) of the Exchange Act and Rule
10b-5 thereunder and NASD Rules 2110 and 2120. According to the complaint,
the alleged manipulation resulted in an illicit profit to the Representative
of approximately $402,509. The Representative and its then president have
indicated that they intend vigorously to contest the allegations. A hearing
has not yet been scheduled and there have been no findings of fact or
violations of law in this case. See "Risk Factors."
SELLILNG SECURITY HOLDERS
The Registration Statement of which this Prospectus forms a part also
includes an Alternate Prospectus that covers a "Concurrent Offering" by
certain Selling Security Holders (as defined below). The Concurrent Offering
includes an offering of 400,000 shares of Common Stock and 1,400,000 Class A
Warrants owned by the Bridge Lender and the exercise of the Common Stock
underlying the 1,400,000 Class A Warrants by the transferees of the Bridge
Lender. The Alternate Prospectus also covers the resale of 200,000 Class A
Warrants owned by Miller and the exercise of such 200,000 Class A Warrants by
the transferees of Mr. Miller. In addition to the foregoing, the Alternate
Prospectus includes the resale of up to 69,000 Units (identical to those sold
in the Offering) to be offered by Duncan Hill and the exercise of the Common
Stock underlying the 138,000 Class A Warrants by the transferees of Duncan
Hill. See "Principal and Selling Stockholder." To the extent that the
Underwriters exercise the Over-Allotment Option as described herein, then the
number of Units to be offered by Duncan Hill in the Concurrent Offering will
be proportionately reduced. (The Bridge Lender, Miller,
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and Duncan Hill are hereinafter collectively referred to as the "Selling
Security Holders.") The securities offered as part of the Concurrent
Offering may be sold at any time after the date of this Prospectus. The Class
A Warrants held by the Selling Security Holders are identical to the Class A
Warrants being offered by the Company. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Certain Transactions" and "Risk
Factors -- Potential Adverse Effect of Redemption or Exercise of Class A
Warrants."
Except for Miller's Common Stock ownership, which is not being offered
for sale, the following tables set forth the beneficial ownership of the
Common Stock and Class A Warrants of the Company held by each Selling
Security Holders prior to the Offering and after the Offering, assuming all
of the Common Stock and Class A Warrants owned and to be offered for sale by
the Selling Security Holders are sold. The number of shares of Common Stock
owned by the Selling Security Holders do not include beneficial ownership of
options and Class A Warrants.
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TABLE I (Common Stock)
<TABLE>
<CAPTION>
PERCENT OF COMMON STOCK
COMMON STOCK OWNED OWNED%
--------------------- ------------------------
PRIOR TO AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING
- ---------------------------------------------------------------------- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee (1)(2)........................................................ 400,000 -0- 28.5 0
Duncan Hill .......................................................... 1,000,000 931,000 100.0 50.1
</TABLE>
TABLE II (Class A Warrants)
<TABLE>
<CAPTION>
CLASS A WARRANTS PERCENT OF CLASS A
OWNED WARRANTS OWNED%
------------------------- --------------------------
PRIOR TO AFTER PRIOR TO AFTER
NAME OF BENEFICIAL OWNER OFFERING(1) OFFERING OFFERING OFFERING
- ----------------------------------------------------------------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee (1)(2)......................................................... 1,400,000 -0- 80.6 -0-
Duncan Hill ........................................................... 138,000 -0- 7.9 -0-
William L. Miller...................................................... 200,000 -0- 11.5 -0-
</TABLE>
- ------------------------
(1) Assumes Common Stock and Class A Warrants are outstanding prior to the
Offering notwithstanding that such securities are not issuable upon
conversion of a Convertible Note until the Closing Date of the Offering.
(2) The sole beneficiary of the trust is Pamela Osowski.
Miller is the Company's Chief Executive Officer and Duncan Hill
is the Company's sole stockholder prior to the Offering. See "Certain
Transactions" and "Principal and Selling Stockholders." The Bridge Lender is
not affiliated with the Company in any capacity, has had no business
relationship with the Company at any time and has not owned any of the
Company's Securities beneficially or of record prior to the Offering other
than the Convertible Note and Non-Convertible Note issued to the Bridge
Lender on January 23, 1998. See "Use of Proceeds--Bridge Lenders."
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The securities offered hereby may be sold from time to time directly by
the Selling Security Holders. Alternatively, the Selling Security Holders may
from time to time offer such securities through underwriters, dealers or
agents. The distribution of securities by the Selling Security Holders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of securities. The Selling Security
Holders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect
to the Securities offered, and any profits realized or commissions received
may be deemed underwriting compensation.
As of the date of this Prospectus, the Selling Security Holders and the
Representative have advised the Company that they do not have any current or
future plans, proposals, agreements, arrangements or understandings with
respect to engaging in transactions with or by Selling Security Holders. The
Company has filed an undertaking with the Commission to file a post-effective
amendment to its Registration Statement of which this Prospectus and the
Alternate Prospectus is a part in the event that the Selling Security
Holders advise the Company that it intends to enter into an agreement or
understanding to sell their securities through a broker-dealer where such
broker-dealer would be deemed to be participating in a distribution of
registered securities as an "underwriter."
At the time a particular offer of the shares of Common Stock and/or
Class A Warrants is made by or on behalf of the Selling Security Holders, to
the extent required, a prospectus will be distributed which will set forth
the number of the shares of Common Stock and/or Class A Warrants being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the shares of Common Stock and/or Class A Warrants purchased
from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Exchange Act, and the regulations thereto, any person engaged
in a distribution of the shares of Common Stock and/or Class A Warrants of
the Company offered by the Selling Security Holders may not simultaneously
engage in market-making activities with respect to such securities of the
Company during the applicable "cooling off" period (up to 5 days) prior to
the commencement of such distribution. In addition, and without limiting the
foregoing, the Selling Security Holders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation, Regulation M, in connection with transactions
in such securities, which provisions may limit the timing of purchase and
sales of the Securities by the Selling Securities Holders.
87
<PAGE>
LEGAL MATTERS
The validity of the Securities being offered hereby will be passed upon
for the Company by Lester Morse P.C., Suite 420, 111 Great Neck Road, Great
Neck, NY 11021. Certain legal matters will be passed upon for the
Underwriters by Mintz & Gold, LLP, 444 Park Avenue South, New York, NY 10016.
Lester Morse P.C. has in the past represented the Representative in
connection with matters unrelated to the Offering.
EXPERTS
The financial statements of The Havana Group, Inc. as of December 31,
1997 and for the years ended December 31, 1997 and 1996 appearing in this
Prospectus, have been audited by Hausser + Taylor LLP, independent auditors,
and are included herein in reliance upon the authority of said firm as
experts in auditing and accounting.
88
<PAGE>
THE HAVANA GROUP, INC.
AND SUBSIDIARY
FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
INDEPENDENT AUDITORS' REPORT............................ 1
FINANCIAL STATEMENTS
Consolidated balance sheet............................ 2-3
Consolidated statements of operations................. 4
Consolidated statements of stockholder's equity....... 5
Consolidated statements of cash flows................. 6
Notes to consolidated financial statements............ 7-17
</TABLE>
1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Stockholder and Board of Directors
The Havana Group, Inc.
Canton, Ohio
We have audited the accompanying consolidated balance sheet of The
Havana Group, Inc. and Subsidiary as of December 31, 1997, and the related
consolidated statements of operations, stockholder's equity, and cash flows
for the years ended December 31, 1997 and 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Havana Group, Inc. and Subsidiary as of December 31, 1997, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997 and 1996, in conformity with generally accepted
accounting principles.
As discussed in Note B to the consolidated financial statements, The Havana
Group, Inc. was formed in December 1997 and prior to then had no operations. The
results of operations and cash flows prior to December 1997 included in the
accompanying consolidated financial statements are those of the predecessor
companies, E. A. Carey of Ohio, Inc. and Monarch Pipe Company.
CANTON, OHIO
February 10, 1998
2
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1997
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS
Cash............................................................................ $ 79,611
Accounts receivable, net of allowance for doubtful accounts of $5,500........... 37,574
Inventories..................................................................... 477,907
Deferred catalog expense........................................................ 54,183
Prepaid expenses................................................................ 3,587
----------
Total current assets......................................................... 652,862
DEFERRED FEDERAL INCOME TAX....................................................... 29,070
PROPERTY AND EQUIPMENT
Leasehold improvements.......................................................... 83,945
Furniture and fixtures.......................................................... 10,946
Machinery and equipment......................................................... 83,575
----------
178,466
Less accumulated depreciation................................................... 84,649
----------
93,817
OTHER ASSETS, net of accumulated amortization
Customer lists.................................................................. 464,479
----------
$1,240,228
----------
----------
</TABLE>
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable............................................................... $ 177,893
Due to affiliates.............................................................. 130,392
Customer advances.............................................................. 7,836
Accrued expenses............................................................... 994
Total current liabilities................................................. 317,115
----------
STOCKHOLDER'S EQUITY
Preferred stock--$.001 par value, 10,000,000 shares authorized:
Class A--5,000,000 shares issued and outstanding............................. 5,000
Class B--1,100,000 shares issued and outstanding............................. 1,100
Common stock--$.001 par value, 25,000,000 shares authorized, 1,000,000 shares
issued and outstanding....................................................... 1,000
Additional paid-in capital..................................................... 1,092,900
Retained earnings (deficit).................................................... (176,887)
----------
Total stockholder's equity................................................ 923,113
----------
$1,240,228
----------
----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
NET SALES............................................................................. $ 1,427,574 $ 1,656,316
COST OF SALES......................................................................... 773,695 946,660
------------ ------------
GROSS PROFIT.......................................................................... 653,879 709,656
SELLING EXPENSES...................................................................... 316,699 374,303
GENERAL AND ADMINISTRATIVE EXPENSES................................................... 398,952 450,876
------------ ------------
NET LOSS.............................................................................. $ (61,772) $ (115,523)
------------ ------------
------------ ------------
BASIC AND DILUTED LOSS PER SHARE...................................................... $ (.06) $ (.12)
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
COMMON PREFERRED PAID-IN RETAINED
STOCK STOCK CAPITAL EARNINGS TOTAL
----------- ------------------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE--JANUARY 1, 1996............ $ 500 $ -- $ -- $ 800,408 $ 800,908
NET LOSS............................ -- -- -- (115,523) (115,523)
BALANCE--DECEMBER 31, 1996.......... 500 -- -- 684,885 685,385
RETURN OF ADDITIONAL CAPITAL
CONTRIBUTION TO DUNCAN HILL....... (500) -- -- -- (500)
ISSUANCE OF 1,000,000 SHARES OF
COMMON STOCK TO PARENT COMPANY.... 1,000 -- (1,000) -- --
ISSUANCE OF 5,000,000 SHARES OF
CLASS A PREFERRED STOCK TO PARENT
COMPANY........................... -- 5,000 (5,000) -- --
ISSUANCE OF 1,100,000 SHARES OF
CLASS B PREFERRED STOCK TO PARENT
COMPANY........................... -- 1,100 1,098,900 (800,000) 300,000
NET LOSS............................ -- -- -- (61,772) (61,772)
BALANCE--DECEMBER 31, 1997.......... $1,000 $6,100 $1,092,900 $(176,887) $ 923,113
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................................................. $ (61,772) $ (115,523)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Depreciation and amortization.......................................................... 39,780 38,706
(Increase) decrease in accounts receivables--trade..................................... (3,294) 44,829
(Increase) decrease in inventories..................................................... (206,569) 35,070
(Increase) in deferred catalog expense................................................. (12,215) (4,084)
(Increase) in prepaid expenses......................................................... (2,249) (1,338)
Increase in accounts payable, customer advances and accrued expenses................... 37,104 34,079
Net cash (used) provided by operating activities........................................... (209,215) 31,739
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in due to affiliates................................................. 378,322 (35,165)
Return of additional capital contribution to Duncan Hill................................. (500) --
Net cash provided (used) by financing activities........................................... 377,822 (35,165)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment....................................................... (94,891) --
NET INCREASE (DECREASE) IN CASH............................................................ 73,716 (3,426)
CASH--BEGINNING............................................................................ 5,895 9,321
CASH--ENDING............................................................................... $ 79,611 $ 5,895
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITY
Issuance of 1,100,000 shares of Series B preferred stock to
Duncan Hill for the assumption of a $300,000 liability................................... $ 300,000 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business Description and Principles of Consolidation--The Havana
Group, Inc. (Company) is in the mail order business and sells to
customers throughout the United States. The Company sells tobacco,
cigars, smoking pipes and accessories. Products are purchased from a
variety of manufacturers. The consolidated financial statements
include the accounts of The Havana Group, Inc., and its wholly-owned
subsidiary, Monarch Pipe Company (Monarch). Monarch manufactures
smoking pipes and sells them exclusively to the Company. All
significant intercompany accounts and transactions have been
eliminated in consolidation. The Company grants credit to E. A. Carey
Tobacco Club members.
B. Reorganization--The Havana Group, Inc. was formed as a wholly-owned
subsidiary of Duncan Hill, Inc. in December 1997. The operations included in
the accompanying financial statements prior to December 1997 are those of E.
A. Carey of Ohio, Inc. (Carey), which was dissolved as part of the
reorganization and Monarch Pipe. Carey and Monarch Pipe were both
wholly-owned subsidiaries of Duncan Hill, Inc. prior to the reorganization.
The Company acquired the assets and liabilities of Carey and the common stock
of Monarch Pipe in the reorganization, which was accounted for at historical
cost as a reorganization of companies under common control.
C. Use of Estimates--The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
D. Fair Value of Financial Instruments--The fair value of cash, accounts
receivable, accounts payable and other short-term obligations
approximate their carrying values because of the short maturities of
those financial instruments.
E. Trade Receivables--It is the Company's policy to record accounts
receivable net of an allowance for doubtful accounts. The allowance
was $5,500 as of December 31, 1997. Bad debt expense was $14,041 and
$41,942 for the years ended December 31, 1997 and 1996, respectively.
7
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
F. Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out (FIFO) method.
G. Deferred catalog expenses are costs of catalogues mailed to
customers which are deferred and amortized over periods ranging from four
weeks to six months, the estimated length of time customers utilize catalog
and other mail order mailings. Catalog expense was $263,675 and $332,629 for
the years ended December 31, 1997 and 1996, respectively.
H. Property and equipment are carried at cost and depreciated using the
straight-line and accelerated methods over their estimated useful lives
ranging from five to ten years. Depreciation expense amounted to $1,074 for
the year ended December 31, 1997. There was no depreciation expense for the
year ended December 31, 1996.
Maintenance, repairs, and minor renewals are charged against earnings
when incurred. Additions and major renewals are capitalized.
I. A customer list was obtained in the acquisition of Carey in 1984 for
$889,000. The acquisition was consummated primarily to obtain Carey's mailing
list. The list is being amortized on a straight-line basis through 2008. At
December 31, 1997, accumulated amortization was $424,521.
J. Deferred taxes have been recognized to reflect temporary
differences between financial reporting and income tax purposes. The
principal differences are due to net operating losses and the treatment of
deferred catalog expense.
8
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. Per Share Amounts--Net income per share is calculated using the
weighted average number of shares outstanding during the year. Duncan Hill,
Inc., the Company's parent, holds 1,000,000 shares of common stock which were
assumed to be outstanding during 1997 and 1996 for purposes of the basic
earnings per share calculation. Duncan Hill, Inc. also holds 1,100,000
convertible preferred Class B shares that were not included in the
computation of diluted earnings per share because the Company had a net loss
and inclusion would therefore be antidilutive. Additionally conversion is
contingent upon the Company attaining pre-tax profit of $500,000 in any
calendar year.
L. New Authoritative Pronouncements -- Effective January 1, 1996, the
Company adopted the provisions of Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." SFAS 121 requires the Company to review
long-lived assets and certain identifiable intangibles, including goodwill,
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
The adoption of SFAS 121 did not have an effect on the Company's
consolidated financial statements.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued which establishes
accounting and reporting standards for stock-based compensation plans. This
standard encourages the adoption of the fair value-based method of accounting
for employee stock options or similar equity instruments, but continues to
allow the Company to measure compensation cost for those equity instruments
using the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, this standard does not have any
effect to the Company's consolidated financial statements other than to
require disclosure of the pro forma effect on net (loss) of using the fair
value-based method of accounting.
- ----------------
In February 1997, SFAS 128, "Earnings per Share" and SFAS 129, "Disclosure
of Information About Capital
9
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Structure," were issued. SFAS 128 establishes new standards for computing and
reporting earnings per share.
SFAS 129 requires an entity to explain the pertinent rights and
privileges of outstanding securities. The Company adopted these new standards
in the period ended December 31, 1997. All prior period earnings per share
data have been restated for the adoption of SFAS 128. The effect of adoption
was not material.
- ----------------
In June 1997, the Financial Accounting Standards Board issued SFAS 130,
"Reporting Comprehensive Income," which is effective for periods beginning
after December 15, 1997. SFAS No. 130 established new standards for reporting
comprehensive income and its components. The Company expects that
comprehensive income (loss) will not be materially different from net income
(loss).
10
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information." SFAS
131 changes the standards for reporting financial results by operating
segments, related products and services, geographical areas and major
customers. The Company must adopt SFAS 131 no later than December 31, 1998.
The Company believes that the effect of adoption will not be material.
M. Reclassification--Certain amounts in the 1996 financial statements
have been reclassified to conform to the 1997 presentation.
Note 1. Inventories
Inventories consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Raw materials................................................. $ 107,994
Pipes......................................................... 58,647
Tobacco and cigars............................................ 244,800
Accessories................................................... 20,177
Supplies and catalogues....................................... 46,289
$ 477,907
</TABLE>
11
<PAGE>
Note 2. Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standard No. 109, Accounting for Income Taxes.
Deferred income taxes reflect the effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes. Deferred tax assets (liabilities) consisted of the following at
December 31, 1997:
<TABLE>
<S> <C>
Deferred tax asset for net operating loss carryforward.......... $ 124,270
Valuation allowance............................................. (76,613)
Total deferred tax assets....................................... 47,657
Deferred tax liabilities:
Deferred catalog expense...................................... (18,422)
Depreciation.................................................. (165)
Total deferred tax liabilities.................................. (18,587)
Net deferred tax asset.......................................... $ 29,070
</TABLE>
The Company's ability to recognize deferred tax assets is dependent on
generating future regular taxable income. In accordance with the provisions
of SFAS 109, management has provided a valuation allowance.
The Company has net operating loss carryforwards which will expire as
follows:
12
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 2. Income Taxes (Continued)
<TABLE>
<CAPTION>
YEAR AMOUNT
--------- -----------
<S> <C>
2008............................ $ 6,500
2009............................ 57,600
2010............................ 105,900
2011............................ 121,000
2012............................ 74,500
--------
$365,500
--------
--------
</TABLE>
NOTE 3. PARENT CORPORATION
Effective January 1, 1997, the Company contracted with Kids Stuff, Inc.
("Kids"), a subsidiary of Duncan Hill, Inc., to provide telemarketing, order
fulfillment, data processing and certain administrative functions. The
Company is charged for its portion of the expenses on a direct cost basis, as
applicable, or on a pro rata basis. Actual costs are those direct costs that
can be charged on a per order or per hour basis, fixed costs are allocated on
a pro rata basis by dividing the total assets of the Company by the sum of
the total assets of the Company and Kids. Effective January 1, 1998, the
Company renewed this contract with Kids at an annual cost of approximately
$206,100 for the administrative, executive and accounting services, as
outlined below, and $2.40 per order processed. The Company is also obligated
to pay 5% of its 1998 pre-tax profit to Kids in connection with those
administrative and fulfillment services. Management believes that this
is substantially the same cost that it would incur should it procure these
services itself.
<TABLE>
<S> <C>
Accounting and Payroll Services............................ $ 34,000
Administration and Human Resource Management............... 51,600
Data Processing............................................ 34,900
Office Equipment and Facilities Use........................ 32,200
Merchandising and Marketing Services....................... 38,100
Purchasing Services........................................ 15,300
---------
Total...................................................... $ 206,100
---------
---------
</TABLE>
13
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 3. Parent Corporation (Continued)
Prior to 1997, these services were provided by Duncan Hill, Inc. and
Kids, as applicable. Total costs allocated to the Company were $450,443 and
$511,472 in 1997 and 1996, respectively.
The accounts receivable and inventory of the Company and Kids are
pledged as collateral which guarantees an $800,000 line of credit reflected
on the financial statements of Kids. The Company's guarantee relative to the
line of credit is irrevocable. The balance on the line of credit was $671,000
at December 31, 1997.
Note 4. Stockholder's Equity
A. Common Stock
The Havana Group, Inc. has 25,000,000 shares of $.001 par value Common
Stock authorized. In connection with the reorganization discussed in Note B,
the Company issued 1,000,000 shares to its parent, Duncan Hill, Inc. The
holders of Common shares are entitled to one vote on all stockholder matters.
The Company is not currently subject to any contractual arrangements which
restricts its ability to pay cash dividends. The Company's Certificate of
Incorporation prohibits the payment of cash dividends on the Company's Common
Stock in excess of $.05 per share per year so long as any Serial Preferred
Stock remains outstanding unless all accrued and unpaid dividends on Serial
Preferred Stock has been set apart and there are no arrearages with respect
to the redemption of any Series Preferred Stock.
B. Series A Preferred Stock
The Board of Directors has the authority, without further action by
the stockholders, to issue up to 10,000,000 shares of Preferred Stock in one
or more series and to fix the rights, preferences, privileges, and
restrictions thereof, including dividend rights, conversion rights, voting
rights, terms of redemption, liquidating preferences, and the number of
shares constituting any series or the designation of such series.
On December 24, 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock (Series A), $.001 par value to Duncan Hill, Inc. The holders of
the Series A stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders.
The Series A stock is not subject to redemption and has no conversion rights
or rights to participate in dividend payments. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the affairs of the
Company, each share of Series A stock has a liquidation preference of $.001 per
share.
14
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 4. Stockholder's Equity (Continued)
C. SERIES B PREFERRED STOCK
On December 24, 1997, the Company issued 1,100,000 shares of its Series B
Convertible Preferred Stock (Series B) $.001 par value to Duncan Hill. In
return, Duncan Hill assumed a $300,000 liability due to an affiliate. The
Series B stock has the same voting privileges as the Common Stock. Each share
of Series B stock is convertible into one share of the Company's Common stock
at the option of either the holder or the Company upon the Company's net
pre-tax profit reaching $500,000 in any given calendar year. The holder of
each share of Series B Preferred Stock will be entitled to receive, when, as,
and if declared by the Board of Directors of the Company, out of funds
legally available therefor, annual dividends at the rate of $.10 per share
and, no more, payable out of surplus or net profits of the Company on a
quarterly basis. As the Series B Preferred pays a $.10 dividend per share,
the Company has recorded the Series B stock at $1.00 per share to reflect its
estimated fair value.
The series B stock is not subject to redemption. In the event of a
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company, each share of Series B stock has a liquidation preference of
$.001, which is subordinated to the liquidation preference of the Series A
stock.
D. In December 1997, the Company issued 138,000 warrants to Duncan Hill,
Inc. Upon completion of the Company's initial public offering, these warrants
automatically convert into Class A Warrants identical to those to be sold to the
public.
E. Sale of Unregistered Securities
In January 1998, the Company borrowed $100,000 from one private investor
in exchange for a convertible promissory note (Convertible Note). The
Convertible Note bears interest at 8% per annum and is payable on December
31, 1998. However, if the Company completes its initial public offering, the
note is automatically converted into an aggregate of 400,000 shares of Common
Stock and 1,400,000 warrants. In accordance with APB 14 and EITF Topic No.
D-60, the beneficial conversion feature of the note will be recognized as
additional paid-in capital and charged to interest expense over the term of
the note. The value of the
15
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 4. Stockholder's Equity (Contined)
conversion feature of $1,820,000 is calculated as the difference between the
expected IPO price of $6.00 per share, less a 20% discount and the $.25 debt
conversion rate multiplied by 400,000 shares of common stock.
Each warrant allows the holder to purchase a share of the Company's
Common Stock at an exercise price of $5.25 per share. The warrants are
exercisable upon the separation date to be determined and expire five years
from the effective date of the Company's initial public offering. The
warrants may be redeemed by the Company at a price of $.01 per warrant, at
any time after they become exercisable, upon not less than 30 days' prior
notice, if the closing bid price of the Common Stock has been at least $10.50
per share for 20 consecutive trading days ending on the fifteenth day prior
to the date on which the notice of redemption is given.
Note 5. Bridge Loan
In January 1998, the Company borrowed $100,000 from one private
investor evidenced by a promissory note of $100,000. This is the same private
investor mentioned in Note 4E, "Sale of Unregistered Securities." The note
bears interest at 8% per annum and is due at the earlier of December 31,
1998, or the successful completion of the Company's initial public offering.
Note 6. Incentive Plans
A. Stock Incentive Plan
During 1997, the Company adopted a Stock Incentive Plan. Under the Stock
Incentive Plan, the Compensation Committee of the Board of Directors may grant
stock incentives to key employees and the directors of the Company pursuant to
which a total of 400,000 shares of Common Stock may be issued; provided,
however, that the maximum amount of Common Stock with respect to which stock
incentives may be granted to any person during any calendar year shall be 20,000
shares, except for a grant made to a recipient upon the recipient's initial
hiring by the Company, in which case the number shall be a maximum of 40,000
shares. These numbers are subject to adjustment in the event of a stock split
and similar
16
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 6. Incentive Plans (Continued)
events. Stock incentive grants may be in the form of option, stock
appreciation rights, stock awards, or a combination thereof. No stock
incentives were granted under the Stock Incentive Plan in 1997.
B. Incentive Compensation Plan
The Company's Incentive Compensation Plan (Plan) is designed to motivate
employee participants to achieve the Company's annual strategic goals.
Eligibility for participation in the plan is limited to the Chief Executive
Officer and the Executive Vice President of the Company, and such other
employees of the Company as may be designated by the Board of Directors from
time to time. For each fiscal year of the Company, the Board will establish a
bonus pool not to exceed 10% of the Company's operating income. The amount of
such pool with respect to any year shall be determined subsequent to the end
of the year upon the determination of the Company's operating income for that
year. Each participant in the Plan is eligible to receive from the bonus pool
an annual award up to 50% of the participant's base salary. There were no
awards in 1997 or 1996.
Note 7. Employment Agreement
The Company has entered into a five-year employment agreement with William
L. Miller effective December 1, 1997, pursuant to which Mr. Miller is to serve
as Chief Executive Officer and President of the Company. The employment
agreement provides for an annual base salary of $50,000, increasing to at least
$100,000 for the remainder of the contract if the Company's revenues for any
fiscal year exceed $5,000,000. The employment agreement also provides for the
eligibility of Mr. Miller to receive annual cash bonuses under the Company's
Incentive Compensation Plan, of a maximum of 50% of Mr. Miller's prior year's
base salary.
Mr. Miller was granted under his employment agreement 200,000 Common Stock
Purchase warrants at $6.00 per share. The warrants are convertible into Class A
warrants upon the effectiveness of the Company's planned registration statement,
bearing the same terms and conditions as those Class A warrants issued by the
Company being registered.
17
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 7. Employment Agreement (Continued)
Mr. Miller was also granted under his employment agreement an option to
purchase 200,000 shares of the Company's Common Stock, which will vest 20% on
each of the following dates: December 1, 1997; January 1, 1998; January 1,
1999; January 1, 2000; and January 1, 2001, regardless of whether the
executive is employed on such dates by the Company. The vested options will
be immediately exercisable and will expire 10 years from the date of the
agreement. The exercise price of the options will be $6.00 per share, subject
to downward adjustments in the exercise price if the Company meets certain
performance goals.
Mr. Miller's contract allows for termination by the Company for cause. If
the agreement is terminated by the Company without cause, or by Mr. Miller due
to a material change in his responsibilities, functions, or duties, the Company
shall pay Mr. Miller a lump sum on the date of termination as severance pay an
amount equal to 2.99 times the sum of Mr. Miller's salary and bonus paid in the
year prior to the year of termination.
Note 8. Fair Value of Stock Based Compensation
In addition to the options to purchase 200,000 shares of common stock and
Common Stock Purchase Warrants to purchase 200,000 shares of common stock at
$6.00 per share issued to Mr. Miller (both described in Note 7), the Company has
granted options to purchase 60,000 shares of common stock to certain directors
with the same terms as the options granted to Mr. Miller.
As described in Note L, the Company accounts for employee stock options
under APB 25 and, accordingly, no compensation cost has been recognized. If the
Company had elected to recognize compensation cost consistent with the method
prescribed by SFAS 123, the Company's net loss would have been increased by
approximately $1,382,000 or $1.38 per share for the year ended December 31,
1997.
For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted using the Black-Scholes option
pricing model assuming no dividends, 45% volatility, an expected life of 50% of
the ten-year option terms, and a risk-free interest rate of 6.3%.
18
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Note 9. Public Offering
In February 1998, the Company filed a registration statement relating to an
offering by the Company of 529,000 units at an offering price of $6 per unit,
including 69,000 units to cover over-allotments, if any, each unit consisting of
one share of common stock, $.001 par value, and two Class A Warrants. The over-
allotment, if exercised, will be sold on behalf on Duncan Hill out of the
1,000,000 shares of Common stock and 138,000 Class A Warrants owned by Duncan
Hill, with net proceeds to be received by Duncan Hill.
The common stock and warrants are not detachable or separately
transferable until the separation date. Each warrant entitles the holder to
purchase one share of common stock at a price of $5.25 commencing from the
separation date until five years from the date of this prospectus. The
Company may redeem the Warrants at a price of $.01 per Warrant, at any time
after they become exercisable, upon not less than 30 days' prior written
notice, if the closing bid price of the Common Stock has been at least $10.50
per share for 20 consecutive trading days ending on the fifteenth day prior
to the date on which the notice of redemption is given.
19
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SHARES
OF COMMON STOCK AND WARRANTS OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN
WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IS UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
Prospectus Summary...................................................
Risk Factors.........................................................
Use of Proceeds......................................................
Dividend Policy......................................................
Dilution.............................................................
Capitalization.......................................................
Selected Financial Data..............................................
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................
The Company and Its Parent...........................................
Business.............................................................
Management...........................................................
Principal and Selling Stockholders...................................
Certain Transactions.................................................
Description of Securities............................................
Unregistered Shares Eligible for Immediate and Future Sale...........
Underwriting.........................................................
Selling Security Holders.............................................
Legal Matters........................................................
Experts..............................................................
Index to Financial Statements........................................
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE SHARES OF UNITS, COMMON STOCK AND
WARRANTS OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
460,000 UNITS
EACH UNIT CONSISTING OF ONE SHARE OF COMMON
STOCK AND TWO CLASS A COMMON STOCK
PURCHASE WARRANTS
THE HAVANA GROUP, INC.
PROSPECTUS
VTR CAPITAL, INC.
, 1998
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<PAGE>
Alternate
Subject to completion March 31, 1998
PROSPECTUS
THE HAVANA GROUP, INC.
469,000 Shares of Common Stock
1,738,000 Class A Common Stock Purchase Warrants
This Prospectus includes the registration on behalf of a bridge lender
(the "Bridge Lender") as a Selling Security Holder of the (i) resale of
400,000 shares of Common Stock and 1,400,000 Class A Warrants issuable to the
Bridge Lender by The Havana Group, Inc. (the "Company ") upon the completion
of the Company's Initial Public Offering pursuant to a separate Prospectus
(the "Offering") in accordance with the automatic conversion of a convertible
note and (ii) the exercise of such 1,400,000 Class A Warrants by the
transferees of the Bridge Lender. This Prospectus also includes the resale
of 200,000 Class A Warrants owned by William Miller, the Company's Chief
Executive Officer ("Miller"), and the 200,000 shares issuable upon exercise
thereof by the transferees of Miller. The 200,000 Class A Warrants are
issuable by the Company pursuant to Warrants which provide for the automatic
conversion of the Warrants into Class A Warrants upon the completion of the
Offering. In the event that the Underwriters' Over-Allotment Option as
discussed under "Concurrent Sales" is not exercised in its entirety, then
this Prospectus includes the resale of up to 69,000 Units (identical to those
sold in the Offering) to be offered by Duncan Hill Inc., the Company's sole
stockholder prior to the Offering ("Duncan Hill" or the "Selling Unit
Holder"), including the exercise of 138,000 Class A Warrants by the
transferees of Duncan Hill. The securities offered herein may be sold
concurrently with or after the Offering subject to the Company's obligation
under certain circumstances described herein to file a Post-Effective
Amendment to the Registration Statement of which this Prospectus is a part.
(The Bridge Lender, Miller and Selling Unit Holder are hereinafter
collectively referred to as the "Selling Security Holders.") The
aforementioned securities in the aggregate are collectively referred to as
the "Securities." For a description of the Offering, see "Concurrent Sales."
Each Class A Warrant entitles the holder to purchase one share of Common
Stock at a price of $5.25 and are exercisable from the earlier of (i)
_________, 1998 (six months from the date of this Prospectus) or (ii) a date
selected by VTR Capital, Inc., the Representative of the Underwriters in the
Offering (the "Representative"), in writing for separation (the "Separation
Date") until five years after the date of this Prospectus. The Company may
redeem the Class A Warrants at a price of $.10 per Warrant, at any time after
one year from the date of this Prospectus, upon not less than 30 days' prior
written notice, if the closing bid price of the Common Stock has been at
least $10.50 per share for 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given. See
"Description of Securities."
ALT-1
<PAGE>
Alternate
The securities offered hereby may be sold from time to time directly by the
Selling Security Holders. Alternatively, the Selling Security Holders may
from time to time offer such securities through underwriters, dealers or
agents. The distribution of securities by the Selling Security Holders may
be effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of securities. The Selling Security
Holders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect
to the Securities offered, and any profits realized or commissions received
may be deemed underwriting compensation.
--------------------
As of the date of this Prospectus, the Selling Security Holders and the
Representative have advised the Company that they do not have any current or
future plans, proposals, agreements, arrangements or understandings with
respect to engaging in transactions with or by Selling Security Holders. The
Company has filed an undertaking with the Commission to file a post-effective
amendment to its Registration Statement of which this Prospectus is a part in
the event that the Selling Security Holders advise the Company that it
intends to enter into an agreement or understanding to sell their securities
through a broker-dealer where such broker-dealer would be deemed to be
participating in a distribution of registered securities as an "underwriter."
On the date hereof, the Company commenced an initial public offering of
460,000 Units, each Unit consisting of one share of common stock, $.001 par
value and two redeemable Class A Common Stock Purchase Warrants. The Offering
also included an Over-Allotment Option pursuant to which the Underwriters may
purchase up to 69,000 Units from Duncan Hill. See "Concurrent Sales."
The Company will not receive any of the proceeds for the sale of the
Securities by the Selling Security Holders. All costs incurred in the
registration of the Securities of the Selling Security Holders are being
borne by the Company. See "Selling Security Holders."
Prior to the Offering, there has been no public market for any of the
Company's securities. Accordingly, the offering price of the Units in the
Offering and the terms of the Class A Warrants, including the exercise price
of the Class A Warrants, were determined by negotiations between the Company
and the Representative and do not necessarily bear any relationship to the
Company's assets, results of operations or other generally accepted criteria
of value. Factors considered in determining such prices and terms, in
addition to prevailing market conditions, include the history of and the
prospects of the industry in which the Company competes, an assessment of the
Company's management, the results of operations of the Company in recent
periods, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
The Units, Common Stock and Warrants are expected to be approved for
quotation on the Over-the-Counter ("OTC") Electronic Bulletin Board under the
symbols "____," "____," and "____," respectively. See "Risk Factors -
Certain Implications of Trading Over-The-Counter; "Penny Stock Regulations."
There is no assurance, however, that the Company's securities will be
approved for listing on the OTC Electronic Bulletin Board or elsewhere. The
Company anticipates that the Units offered hereby will be qualified for sale
by the Company in a limited number of states. See "Risk Factors - Limits on
Secondary Trading; Current Prospectus and State Blue Sky Registration
Required to Exercise Warrants."
ALT-2
<PAGE>
Upon completion of the Offering, the Selling Unit Holder and Miller
will beneficially own approximately 89% of the Company's outstanding voting
capital stock (not including Class A Warrants and options to be owned by
them). See "Risk Factors - Control by Parent and Parent's Controlling
Stockholders."
AN INVESTMENT IN THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD
THE LOSS OF THEIR ENTIRE INVESTMENT. SEE "RISK FACTORS" BEGINNING ON PAGE __
AND "DILUTION" BEGINNING ON PAGE __.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1998
ALT-3
<PAGE>
Alternate
USE OF PROCEEDS OF COMPANY OFFERING
The net proceeds to be received from the sale of the 460,000 Units
offered by the Company (after deducting underwriting discounts, a 3%
non-accountable expense allowance and other estimated offering expenses) will
be approximately $2,050,000 ($2,037,500 if the Underwriters' Over-Allotment
option is exercised in full). The Company intends to use the net proceeds of
the Offering over at least the next twelve months approximately as follows:
<TABLE>
<CAPTION>
Approximate Approximate
Amount of Percentage of
Net Proceeds Net Proceeds
------------ -------------
<S> <C> <C>
Inventory $ 800,000 39%
Preferred Stock Dividend
to Duncan Hill (1) 110,000 5
Payment of Bridge Lender 102,000 5
Indebtedness (2) 100,000
Marketing (4) 740,000 5
Humidor Construction (3) 36
Officers' Salary 50,000 2
Working Capital (5).......... 148,000 8
------------ -------------
TOTAL.................... $2,050,000 100%
------------ -------------
------------ -------------
</TABLE>
- -------------------
(1) The Company has allocated approximately $110,000 to be paid to Duncan
Hill. The $110,000 represents the first year's cash dividend on the
Series B Preferred Stock. See "Description of Securities."
(2) The Company has also allocated $102,000 to be paid to the Bridge Lender,
who is also a Selling Security Holder, in satisfaction of a
non-convertible note (including accrued interest at the rate of 8% per
annum) which becomes due and payable upon the completion of the
Offering. See "Bridge Financing."
(3) The Company intends to construct its own climate controlled warehouse in
which each Havana Group member would receive an allocated portion
serving as such members personal humidor, capable of storing up to 50
boxes of cigars. See "Business -- Marketing."
(4) See "Business-Marketing"
(5) The Company intends to use the funds allocated toward general working
capital purposes primarily for paying for the ongoing expenses of being
a publicly held corporation and miscellaneous administrative
expenses.--In the event that the Over-Allotment Option is exercised in
full by the Underwriters, working capital and the estimated net proceeds
of the Offering will be reduced by $12,420 which represents the amount
of the expense allowance which the Company has agreed to pay for the
benefit of the Selling Unit Holder. See "Underwriting."
ALT-4
<PAGE>
Alternate
Bridge Financing
On January 23, 1998, the Company raised $200,000 in bridge financing
from ARO Trust #1, 1970 Trust (Linda Gallenberger, Trustee), a
non-affiliated investor, (the "Bridge Lender"). In exchange for the Bridge
Lender making such loan, the Company issued to the Bridge Lender a
non-convertible note due the earlier of the completion of the Offering or
December 31, 1998 in the principal amount of $100,000 (the "Non-Convertible
Note") and a convertible note in the principal amount of $100,000 due
December 31, 1998 (the "Convertible Note"). The Convertible Note and
Non-Convertible Note are collectively referred to as the "Notes." Each Note
bears interest at the rate of eight (8%) percent per annum. The Convertible
Note automatically converts into 400,000 shares of the Company's Common Stock
and 1,400,000 Class A Warrants upon the consummation of the Offering. The
1,400,000 Class A Warrants are identical to the Class A Warrants offered
hereby. The proceeds of the bridge offering were used by the Company to pay
certain expenses in connection with the Offering and to increase working
capital.
The Registration Statement, of which this Prospectus is a part, covers
the sale of the 400,000 shares of the Company's Common Stock and 1,400,000
Class A Warrants (and the exercise of the Class A Warrants by the transferees
of the Bridge Lender) that will be acquired by the Bridge Lender pursuant to
the conversion of the Convertible Note. See "Selling Security Holders."
ALT-5
<PAGE>
Alternate
CONCURRENT SALES
On the date of this Prospectus, a Registration Statement under the
Securities Act with respect to an underwritten initial public offering (the
"Offering") of securities by the Company was declared effective by the
Securities and Exchange Commission ("SEC"), and the Company commenced the
sale of the securities offered thereby. The securities consist of 460,000
Units, each Unit consisting of one share of common stock, $.001 par value and
two redeemable Class A Common Stock Purchase Warrants (without giving effect
to the Over-Allotment Option granted to the Representative of the Offering).
The Offering also includes an Over-Allotment Option of up to 69,000 Units
which the Underwriters may purchase from Duncan Hill. To the extent that the
Over-Allotment Option is not exercised in full by the Underwriters in the
Offering, Duncan Hill will be a Selling Security Holder in this Prospectus.
Sales of securities under this Prospectus by the Selling Security Holders or
event the potential of such sales may have an adverse effect on the market
price of the Company's securities.
SELLING SECURITY HOLDERS
The Concurrent Offering includes an offering of 400,000 shares of Common
Stock and 1,400,000 Class A Warrants owned by the Bridge Lender and the
exercise of the Common Stock underlying the 1,400,000 Class A Warrants by the
transferees of the Bridge Lender. This Prospectus also covers the resale of
200,000 Class A Warrants owned by Miller and the exercise of such 200,000
Class A Warrants by the transferees of Mr. Miller. In addition to the
foregoing, this Prospectus includes the resale of up to 69,000 Units
(identical to those sold in the Offering) to be offered by Duncan Hill and
the exercise of the Common Stock underlying the 138,000 Class A Warrants by
the transferees of Duncan Hill. See "Principal and Selling Stockholders" To
the extent that the Underwriters exercise the Over-Allotment Option as
described herein, then the number of Units to be offered by Duncan Hill, in
the Concurrent Offering will be proportionately reduced. (The Bridge Lender,
Miller, and Duncan Hill are hereinafter collectively referred to as the
"Selling Security Holders.") The securities offered as part of the Concurrent
Offering may be sold at any time after the date of this Prospectus. The Class
A Warrants held by the Selling Security Holders are identical to the Class A
Warrants being offered by the Company. Sales of such securities or even the
potential of such sales at any time may have an adverse effect on the market
prices of the securities offered hereby. See "Certain Transactions" and "Risk
Factors - Potential Adverse Effect of Redemption or Exercise of Class A
Warrants."
Except for Miller's Common Stock ownership, which is not being offered
for sale, the following tables set forth the beneficial ownership of the
Common Stock and Class A Warrants of the Company held by each Selling
Security Holders prior to the Offering and after the Offering, assuming all
of the Common Stock and Class A Warrants owned and to be offered for sale by
the Selling Security Holders are sold. The number of shares of Common Stock
owned by the Selling Security Holders do not include beneficial ownership of
options and Class A Warrants.
ALT-6
<PAGE>
TABLE I (Common Stock)
<TABLE>
<CAPTION>
Percent of Common Stock
Name of Beneficial Owner Common Stock Owned Owned%
- ------------------------ ------------------ -----------------------
Prior to After Prior to After
Offering(1) Offering Offering Offering
---------- -------- -------- --------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee(1)(2) 400,000 -0- 28.5 0
Duncan Hill Inc. 1,000,000 931,000 100.0 50.1
</TABLE>
TABLE II (Class A Warrants)
<TABLE>
<CAPTION>
Class A Warrants Percent of Class A
Name of Beneficial Owner Owned Warrants Owned%
- ------------------------ ------------------ --------------------
Prior to After Prior to After
Offering Offering Offering Offering
-------- -------- -------- --------
<S> <C> <C> <C> <C>
ARO #1 1970 Trust
Linda Gallenberger,
Trustee(1)(2) 1,400,000 -0- 80.6 -0-
Duncan Hill Inc. 138,000 -0- 7.9 -0-
William L. Miller 200,000 -0- 11.5 -0-
</TABLE>
- -------------------
(1) Assumes Common Stock and Class A Warrants are outstanding prior to the
Offering notwithstanding that such securities are not issuable upon
conversion of a Convertible Note until the Closing Date of the Offering.
(2) The sole beneficiary of the trust is Pamela Osowski.
Miller is the Company's Chief Executive Officer and Duncan Hill is the
Company's sole stockholder prior to the Offering. See "Certain Transactions"
and "Principal and Selling Stockholders." The Bridge Lender is not
affiliated with the Company in any capacity, has had no business relationship
with the Company at any time and has not owned any of the Company's
Securities beneficially or of
ALT-7
<PAGE>
Alternate
record prior to the Offering other than the Convertible Note and
Non-Convertible Note issued to the Bridge Lender on January 23, 1998.
See "Use of Proceeds - Bridge Lenders."
The securities offered hereby may be sold from time to time directly by
the Selling Security Holders. Alternatively, the Selling Security Holders may
from time to time offer such securities through underwriters, dealers or
agents. The distribution of securities by the Selling Security Holders may
be effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of securities. The Selling Security
Holders and intermediaries through whom such securities are sold may be
deemed "underwriters" within the meaning of the Securities Act with respect
to the Securities offered, and any profits realized or commissions received
may be deemed underwriting compensation.
As of the date of this Prospectus, the Selling Security Holders and the
Representative have advised the Company that they do not have any current or
future plans, proposals, agreements, arrangements or understandings with
respect to engaging in transactions with or by Selling Security Holders.
The Company has filed an undertaking with the Commission to file a
post-effective amendment to its Registration Statement of which this
Prospectus is a part in the event that the Selling Security Holders advises
the Company that it intends to enter into an agreement or understanding to
sell their securities through a broker-dealer where such broker-dealer would
be deemed to be participating in a distribution of registered securities as
an "underwriter." The post-effective amendment will include a prospectus
which will set forth the number of the shares of Common Stock and/or Class A
Warrants being offered and the terms of the offering, including the name or
names of any underwriters, dealers or agents, if any, the purchase price paid
by any underwriter for the shares of Common Stock and/or Class A Warrants
purchased from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers, and the proposed selling
price to the public.
Under the Exchange Act and the regulations thereto, any person engaged
in a distribution of the shares of Common Stock and/or Class A Warrants of
the Company offered by the Selling Security Holders may not simultaneously
engage in market-making activities with respect to such securities of the
Company during the applicable "cooling off" period (up to 5 days) prior to
the commencement of such distribution.
In addition, and without limiting the foregoing, the Selling Security
Holders will be subject to applicable provisions of the Exchange Act and the
rules and regulations thereunder, including without limitation, Regulation M,
in connection with transactions in such securities, which provisions may
limit the timing of purchase and sales of the Securities by the Selling
Securities Holders.
PLAN OF DISTRIBUTION
The securities offered hereby may be sold from time to time directly by
the Selling Security Holders. Alternatively, the Selling Security Holders may
from time to time offer such securities through underwriters, dealers or
agents. The distribution of securities by the Selling Security Holders may be
effected in one or more transactions that may take place on the
over-the-counter market, including ordinary broker's transactions,
privately-negotiated transactions or through sales to one or more
broker-dealers for resale of such securities as principals, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. Usual and customary or specifically
negotiated brokerage fees or commissions may be paid by the Selling Security
Holders in connection with such sales of securities.
The Selling Security Holders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act with respect to the Securities offered, and any profits
realized or commissions received may be deemed underwriting compensation.
ALT-8
<PAGE>
Alternate
As of the date of this Prospectus, the Selling Security Holders and the
Representative have advised the Company that they do not have any current or
future plans, proposals, agreements, arrangements or understandings with
respect to engaging in transactions with or by Selling Security Holders. The
Company has filed an undertaking with the Commission to file a post-effective
amendment to its Registration Statement of which this Prospectus is a part in
the event that the Selling Security Holders advises the Company that it
intends to enter into an agreement or understanding to sell their securities
through a broker-dealer where such broker-dealer would be deemed to be
participating in a distribution of registered securities as an "underwriter."
The post-effective amendment will include a prospectus which will set forth
the number of the shares of Common Stock and/or Class A Warrants being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, if any, the purchase price paid by any
underwriter for the shares of Common Stock and/or Class A Warrants purchased
from the Selling Security Holders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers and the proposed selling
price to the public.
ALT-9
<PAGE>
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SHARES OF COMMON STOCK AND WARRANTS OFFERED
HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IS UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS SHALL NOT, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary..............................
Risk Factors....................................
Use of Proceeds.................................
Dividend Policy.................................
Dilution........................................
Capitalization..................................
Selected Financial Data.........................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.................................
The Company and Its Parent......................
Business........................................
Management......................................
Principal and Selling Stockholders..............
Certain Transactions............................
Description of Securities.......................
Unregistered Shares Eligible for Immediate
and Future Sale...............................
Underwriting....................................
Selling Security Holders........................
Legal Matters...................................
Experts.........................................
Index to Financial Statements...................
</TABLE>
--------------------
Until ____________, 1998 (90 days after the date of this Prospectus), all
dealers effecting transactions in the shares of Units, Common Stock and
Warrants offered hereby, whether or not participating in the distribution,
may be required to deliver a Prospectus. This is in addition to the
obligation of dealers to deliver a Prospectus when acting as Underwriters and
with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
469,000 SHARES OF COMMON STOCK
1,738,000 CLASS A COMMON STOCK
PURCHASE WARRANTS
THE HAVANA GROUP, INC.
PROSPECTUS
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, as amended, provides
that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that the person is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney's
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. Section 145 further provides that a
corporation similarly may indemnify any such person serving in any such capacity
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person acted in good faith and in a manner the person
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of chancery or such other court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnify for such expenses which the Court of Chancery or such
other court shall deem proper.
Article VII, Section 7, of the By-Laws of the Company provides for
indemnification of officers, directors, employees and agents to the extent
permitted under the Delaware General Corporation Law. The employment agreement
with William L. Miller provide for his indemnification to the full extent
permitted by law.
The Company's Certificate of Incorporation contains a provision eliminating
the personal monetary liability of directors to the extent allowed under the
General Corporation Law of the State of Delaware. Under the provision, a
stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as
II-1
<PAGE>
a director and not, if he is also an officer, his role, as an officer or in any
other capacity or to his responsibilities under any other law, such as federal
securities laws.
Item 25. Other Expenses of Issuance and Distribution.
The estimated expenses in connection with this offering, other than
underwriting discounts and commissions, are as follows:
<TABLE>
<S> <C>
SEC filing fees.................. $6,262.83
NASD fees........................ 2,566.70
Accounting fees and expenses..... 20,000.00
Legal fees....................... 60,000.00
Blue Sky fees and expenses....... 60,000.00
Printing and engraving........... 70,000.00
Miscellaneous expenses........... 28,917.47
Transfer Agent................... 3,500.00
Underwriters' 3%
Non-Accountable Expense
Allowance on 460,000 Units..... 82,800.00
Underwriters' Financial
Consulting Fee................. 100,000.00
-----------
TOTAL $434,047.00
-----------
-----------
</TABLE>
The Company will bear all expenses shown above.
II-2
<PAGE>
Item 26. Recent Sales of Unregistered Securities.
The following shares of unregistered securities have been issued by the
Registrant since its incorporation in Delaware. There were no underwriting
discounts and commissions paid in connection with the issuance of any of said
securities.
(i) Effective December 5, 1997, E. A. Carey of Ohio, Inc. ("Carey") was
merged into the Company, then a wholly owned subsidiary of Carey, for the
purpose of reincorporating Carey in Delaware. In connection with the
reincorporation, the Company issued to its parent, Duncan Hill, Inc.
("Duncan Hill") 100 shares of its Common Stock. This transaction is not
considered a sale within the meaning of Rule 145(a)(2) of the Securities Act of
1933 as amended (the "Securities Act").
(ii) Effective December 8, 1997, the Company's Board of Directors declared
a 10,000 for 1 forward stock split resulting in Duncan Hill receiving 1,000,000
shares of the Company's Common Stock in place of the above referenced 100
shares. This transaction is not considered a sale within the meaning of Rule
145(a)(1) of the Securities Act.
(iii) On December 8, 1997, the Company declared a dividend on its Common
Stock of 5,000,000 shares of its Series A Preferred Stock and 138,000 Warrants
to purchase a like number of shares of Common Stock to Duncan Hill, then the
Company's sole common stockholder. This transaction is not considered a sale
within the meaning of Section 2(a)(3) of the Securities Act.
(iv) On December 8, 1997, the Company sold 1,100,000 shares of its Series B
Preferred Stock to Duncan Hill in exchange for Duncan Hill's assumption of
$300,000 of indebtedness owing to an affiliate. Exemption is claimed on the
issuance of such securities since the transactions did not involve a public
offering within the meaning of Section 4(2) of the Securities Act.
(v) On December 24, 1997, pursuant to an employment contract with
William Miller, the Company's Chief Executive Officer, the Company granted him
options to purchase an additional 200,000 shares of the Company's Common Stock
and Warrants to purchase 200,000 shares of Common Stock. Exemption is claimed
on such securities since the transactions did not involve a public offering
within the meaning of Section 4(2) of the Securities Act.
(vi) On January 23, 1998, the Company received $200,000 from a bridge
lender, ARO #1, 1970 Trust, Linda Gallenberger Trustee (the "Bridge Lender"), in
exchange for a $100,000 non-convertible note (the "Non-Convertible Note") due
the earlier of December 31, 1998 or the completion of the Company's initial
public offering and a $100,000 convertible note due December 31, 1998 (the
"Convertible Note" and together with the Non-Convertible Note, the "Notes").
The Notes bear interest at the rate of 8% per annum. Upon the completion of the
Company's initial public offering, the Convertible Note automatically converts
into 400,000 shares of the Company's Common Stock and 1,400,000 Class A
Warrants. Exemption is claimed under Section 4(6) and Rule 505
II-3
<PAGE>
and/or 506 of Regulation D of the Securities Act since the sale was made to an
accredited investor and there was no general advertising or public solicitation
in connection with the transaction. The Company filed a Form D in February,
1998. The Bridge Lender agreed to take the Notes for investment and without a
view to the distribution or resale thereof and to have an appropriate
restrictive legend placed on its securities. Also, the Bridge Lender which
acquired the notes was provided with all information requested by it and was
afforded access to information and such investor had such knowledge and
experience in financial and business matters that they were capable of
evaluation of the merits and risks of such investment and were able to bear the
economic risk thereof. Accordingly, exemption is also claimed on the sale of
the notes since the transaction did not involve a public offering within the
meaning of Section 4(2) of the Securities Act.
Item 27. Exhibits.
All Exhibits have been previously filed herewith unless otherwise noted.
<TABLE>
<S> <C>
Exhibit 1.0 Revised Underwriting Agreement*
1.1 Agreement Among Underwriters*
1.2 Selected Dealer Agreement*
1.3 Financial Consulting Agreement*
2.0 Certificate of Merger (Ohio)
2.1 Certificate of Merger (Delaware)
2.2 Agreement and Plan of Merger
3.0 Certificate of Incorporation
3.1 Designation of Rights of Series A and Series B Preferred Stock
3.2 By-Laws
4.0 Specimen of Common Stock*
4.1 Specimen of Class A Warrant*
4.2 Specimen of Unit*
4.3 Form of Underwriter's Unit Purchase Option*
4.4 Form of Warrant Agreement*
5.0 Opinion of Lester Morse P.C.*
10.0 Employment Agreement with William L. Miller
10.1 Agreement with Kids Stuff, Inc. as of January 1, 1998
10.2 1997 Long-Term Incentive Plan
10.3 Duncan Hill lease for principal office*
10.4 First Amendment to Exhibit 10.3 lease*
10.5 Kids Stuff credit facility with United National Bank*
10.6 Registrant's guarantee of Exhibit 10.5* (included in Exhibit 10.5)
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
23.0 Consent of Hausser + Taylor LLP*
23.1 Consent of Lester Morse P.C. (included in exhibit 5.0)*
----------------
*Filed herewith.
</TABLE>
Item 28. Undertakings.
(a) Rule 415 Offering
The Company will:
1. File, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) Reflect in the prospectus any facts or events which,
individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement;
(iii) Include any additional or changed material information
on the plan of distribution;
2. For determining liability under the Securities Act, treat each
such post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering.
3. File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(b) Equity Offerings of Nonreporting Small Business Issuers
The Company will provide to the Underwriter at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in such
names as required by the Underwriter to permit prompt delivery to each
purchaser.
(c) Indemnification
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or controlling persons of
the Company pursuant to the provisions referred to in Item 14 of this
Registration Statement or otherwise, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other
II-5
<PAGE>
than the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of any
action, suite or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(d)
In the event that the Selling Security Holders named in the
Prospectus or Alternate Prospectus of which this Prospectus is a part,
advises the Company that it intends to enter into an agreement or
understanding to sell their securities through a broker-dealer where such
broker-dealer would be deemed to be participating in a distribution of
registered securities as an "underwriter, the Registrant undertakes to file a
post-effective amendment to the Registration Statement and to amend the
Prospectus in the event that there are unsold securities.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant certifies that it has reasonable grounds to believe that
it meets all the requirements for filing on Form SB-2, and authorized this
Registration Statement to be signed on its behalf by the undersigned, in the
City of Canton, State of Ohio, on this 30th day of March, 1998.
II-7
<PAGE>
THE HAVANA GROUP, INC.
By: /s/ William L. Miller
------------------------------
Chairman of the Board
Chief Executive Officer,
Treasurer, and Principal
Financial Officer
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William L. Miller Chairman of the Board, Chief March 30, 1998
-------------------------- Executive Officer, Treasurer
William L. Miller and Principal Financial and
Accounting Officer
/s/ John W. Cobb Director March 30, 1998
--------------------------
John W. Cobb
/s/ Peter Stokkebye VI Director March 30, 1998
--------------------------
Peter Stokkebye VI
</TABLE>
II-8
<PAGE>
EXHIBIT 1.0
THE HAVANA GROUP, INC.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
UNDERWRITING AGREEMENT
----------------------
, 1998
VTR Capital, Inc.
17 Battery Place
New York, NY 10004
Gentlemen:
The Havana Group, Inc., a Delaware corporation (the "Company"), proposes
to issue and sell to VTR Capital, Inc. ("VTR" or the "Representative") and to
each of the other underwriters named in Schedule I hereto (the
"Underwriters"), for each of whom you are acting as Representative, an
aggregate of 460,000 Units (the "Units"), each Unit consisting of one share
of Common Stock, par value $.001 ("Common Stock"), and Two Redeemable Class A
Common Stock Purchase Warrants (the "Warrants") of the Company at a public
offering price of $6.00 per Unit. Each Warrant shall entitle the holder to
purchase one share of Common Stock at a price of $5.25 per share as disclosed
in the Registration Statement. The Warrants will be detachable from the
Common Stock on the earlier of six months from the Effective Date or the date
selected by the Representative in writing for separation. The Warrants may
be called by the Company in accordance with the terms of the Prospectus. The
Units are hereinafter referred to as the "Firm Units." Upon the request of
the Representative, and as provided in Section 3 hereof, Duncan Hill, Inc.,
the Company's sole stockholder, will issue and sell to the Underwriters up to
a maximum of an additional 69,000 Units for the purpose of covering
over-allotments. Such additional Units are hereinafter sometimes referred to
as the "Optional Units." Both the Firm Units and the Optional Units are
sometimes collectively referred to herein as the "Units." All of the
securities which are the subject of this Agreement are more fully described
in the Prospectus of the Company described below. In the event that the
Representative does not form an underwriting group but decides to act as the
sole Underwriter, then all references to VTR herein as Representative shall
be deemed to be to it as such sole Underwriter and Section 14 hereof shall be
deemed deleted in its entirety.
In an alternate Prospectus, the Registration Statement also covers
certain additional securities for sale by certain Stockholders and Class A
Warrant holders hereinafter referred to as the "Selling Security Holders".
Such reoffering by Selling Security Holders is not the subject of this
Underwriting Agreement.
The Company understands that the Underwriters propose to make a public
offering of the Units as soon as the Representative deems advisable after the
Registration Statement hereinafter referred to becomes effective. The
Company hereby confirms its agreement with the Representative and the other
Underwriters as follows:
<PAGE>
SECTION 1. Description of Securities. The Company's authorized and
outstanding capitalization when the public offering of securities
contemplated hereby is permitted to commence, under the Securities Act of
1933, as amended (the "Act"), and at the Closing Date (hereinafter defined)
and the terms of the Warrants and other securities will be as set forth in
the Prospectus (hereinafter defined), subject to the terms and conditions
contained in Section 6(m) herein.
SECTION 2. Representations and Warranties of the Company. The
Company hereby represents and warrants to, and agrees with, the Underwriters
as follows:
(a) A Registration Statement on Form SB-2 and amendments thereto
(No. 333-45863) with respect to the Units, including a form of Prospectus
relating thereto, copies of which have been previously delivered to you, have
been prepared by the Company in conformity with the requirements of the Act,
and the rules and regulations (the "Rules and Regulations") of the Securities
and Exchange Commission (the "Commission") thereunder, and has been filed
with the Commission under the Act. The Company, subject to the provisions of
Section 6(a) hereof, may file one or more amendments to such Registration
Statement and Prospectus. The Underwriters will receive copies of each such
amendment.
The date on which such Registration Statement is declared
effective under the Act and the public offering of the Units as contemplated
by this Agreement is therefore authorized to commence, is herein called the
"Effective Date." The Registration Statement and Prospectus, as finally
amended and revised immediately prior to the Effective Date, are herein
called respectively the "Registration Statement" and the "Prospectus." If,
however, a prospectus is filed by the Company pursuant to Rule 424(b) of the
Rules and Regulations which differs from the Prospectus, the term
"Prospectus" shall also include the prospectus filed pursuant to Rule 424(b).
(b) The Registration Statement (and Prospectus), at the time it
becomes effective under the Act, (as thereafter amended or as supplemented if
the Company shall have filed with the Commission an amendment or supplement),
and, with respect to all such documents, on the Closing Date (hereinafter
defined), will in all material respects comply with the provisions of the Act
and the Rules and Regulations, and will not contain an untrue statement of a
material fact and will not omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties contained
in this subsection (b) shall extend to the Underwriters in respect of any
statements in or omissions from the Registration Statement and/or the
Prospectus, based upon information furnished in writing to the Company by the
Underwriters specifically for use in connection with the preparation thereof.
In this regard, the information contained in the disclosures under the
caption "Investigations Involving VTR Capital, Inc." in the "Risk Factors"
and "Underwriting" sections of the Prospectus with regard to the Commission's
and National Association of Securities Dealers, Inc.'s ("NASD") investigation.
(c) The Company has been duly incorporated and is now, and on the
Closing Date will be, validly existing as a corporation in good standing
under the laws of the State of Delaware,
2
<PAGE>
having all required corporate power and authority to own its properties and
conduct its business as described in the Prospectus. The Company is now, and
on the Closing Date will be, duly qualified to do business as a foreign
corporation in good standing in all of the jurisdictions in which it conducts
its business or the character or location of its properties requires such
qualifications except where the failure to so qualify would not materially
adversely affect the Company's business, properties or financial condition.
The Company has no subsidiaries, except as are set forth in the Prospectus.
(d) The financial statements of the Company (audited and
unaudited) included in the Registration Statement and Prospectus present
fairly the financial position and results of operations and changes in
financial condition of the Company at the respective dates and for the
respective periods to which they apply; and such financial statements have
been prepared in conformity with generally accepted accounting principles,
consistently applied throughout the periods involved, and are in accordance
with the books and records of the Company.
(e) Hausser + Taylor LLP, independent auditors, who have given
their report on certain financial statements which are included as a part of
the Registration Statement and the Prospectus are independent public
accountants as required under the Act and the Rules and Regulations.
(f) Subsequent to the respective dates as of which information is
given in the Prospectus and prior to the Closing Date and, except as set
forth in or contemplated in the Prospectus: (i) the Company has not incurred,
nor will it incur, any material liabilities or obligations, direct or
contingent, nor has it, nor will it have entered into any material
transactions, in each case not in the ordinary course of business; (ii) there
has not been, and will not have been, any material change in the Company's
Certificate of Incorporation or in its capital stock or funded debt; and
(iii) there has not been, and will not have been, any material adverse change
in the business, net worth or properties or condition (financial or
otherwise) of the Company whether or not arising from transactions in the
ordinary course of business.
(g) Except as otherwise set forth in the Prospectus, the real and
personal properties of the Company as shown in the Prospectus and
Registration Statement to be owned by the Company are owned by the Company by
good and marketable title free and clear of all liens and encumbrances,
except those specifically referred to in the Prospectus, and except those
which do not materially adversely affect the use or value of such assets and
except the lien for current taxes not now due, or are held by the Company by
valid leases, none of which is in default. Except as disclosed in the
Prospectus and Registration Statement, the Company in all material respects
has full right and licenses, permits and governmental authorizations required
to maintain and operate its business and properties as the same are now
operated and, to its best knowledge, none of the activities or business of
the Company is in material violation of, or causes the Company to violate any
laws, ordinances and regulations applicable thereto, the violation of which
would have a material adverse impact on the condition (financial or
otherwise), business, properties or net worth of the Company.
3
<PAGE>
(h) The Company has no material contingent obligations, nor are
its properties or business subject to any material risks, which may be
reasonably anticipated, which are not disclosed in the Prospectus.
(i) Except as disclosed in the Prospectus and Registration
Statement, there are no material actions, suits or proceedings at law or in
equity of a material nature pending, or to the Company's knowledge,
threatened against the Company which are not adequately covered by insurance,
which might result in a material adverse change in the condition (financial
or otherwise), properties or net worth of the Company, and there are no
proceedings pending or, to the knowledge of the Company, threatened against
the Company before or by any Federal or State Commission, regulatory body, or
administrative agency or other governmental body, wherein an unfavorable
ruling, decision or finding would materially adversely affect the business,
properties or net worth or financial condition or income of the Company,
which are not disclosed in the Prospectus.
(j) All of the outstanding shares of Common Stock and preferred
stock are duly authorized and validly issued and outstanding, fully paid,
non-assessable, and do not have any and were not issued in violation of any
preemptive rights. All of the Common Stock as described in the Prospectus
when paid for shall be duly authorized and validly issued and outstanding,
fully paid, non-assessable, and will not have any and will not be issued in
violation of any preemptive rights. The Common Stock issuable upon exercise
of the Warrants when issued and paid for in accordance with the Warrant
Agreement shall be duly authorized and validly issued and outstanding, fully
paid, non-assessable, and will not have any and will not be issued in
violation of any preemptive rights. The Common Stock and Warrants will be
delivered in accordance with this Agreement and the Warrant Agreement between
the Company and Harris Trust Company. The Underwriters will receive good and
marketable title to the Units purchased by them from the Company, free and
clear of all liens, encumbrances, claims, security interests, restrictions,
stockholders' agreements and voting trusts whatsoever. Except as set forth
in the Prospectus, there are no outstanding options, warrants, or other
rights, providing for the issuance of, and no commitments, plans or
arrangements to issue, any shares of any class of capital stock of the
Company, or any security convertible into, or exchangeable for, any shares of
any class of capital stock of the Company. All of the Units of the Company
to which this Agreement relates conform to the statements relating to them
that are contained in the Registration Statement and Prospectus.
(k) The certificate or certificates required to be furnished to
the Underwriters pursuant to the provisions of Section 11 hereof will be true
and correct.
(l) The execution and delivery by the Company of this Agreement,
the Warrant Agreement (as hereinafter defined) and the Financial Advisory
Agreement (as hereinafter defined) have been duly authorized by all necessary
corporate action and they are valid and binding obligations of the Company,
enforceable against it in accordance with their terms except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other laws pertaining to creditors' rights generally.
4
<PAGE>
(m) Except as disclosed in the Prospectus, no default exists, and
no event has occurred which, with notice or lapse of time, or both, would
constitute a default in the due performance and observance of any material
term, covenant or condition by the Company or any other party, of any
material indenture, mortgage, deed of trust, note or any other material
agreement or instrument to which the Company is a party or by which it or its
business or its properties may be bound or affected, except: (i) as disclosed
in the Prospectus; (ii) such defaults as have been waived by all parties who
would otherwise have a remedy or right with respect thereto; or (iii) such
defaults which will not cause any material adverse change in the business,
net worth, properties or conditions (financial or otherwise), of the Company.
The Company has full power and lawful authority to authorize, issue and sell
the Units to be sold by it hereunder on the terms and conditions set forth
herein and in the Registration Statement and in the Prospectus. No consent,
approval, authorization or other order of any regulatory authority is
required for such authorization, issue or sale, except as may be required
under the Act or State securities laws. The execution and delivery of this
Agreement, the Warrant Agreement (as hereinafter defined) and the Financial
Advisory Agreement (as hereinafter defined), the consummation of the
transactions herein and therein contemplated, and compliance with the terms
hereof and thereof will not conflict with, or constitute a default under any
indenture, mortgage, deed of trust, note or any other agreement or instrument
to which the Company is now a party or by which it or its business or its
properties may be bound or affected; the Certificate of Incorporation and any
amendments thereto; the by-laws of the Company, as amended; or any law,
order, rule or regulation, writ, injunction or decree of any government,
governmental instrumentality, or court, domestic or foreign, having
jurisdiction over the Company or its business or properties.
(n) No officer or director of the Company has taken, and each
officer and director has agreed that he will not take, directly or
indirectly, any action designed to stabilize or manipulate the price of the
Units, the Common Stock or the Warrants in the open market following the
Closing Date or any other type of action designed to, or that may reasonably
be expected to cause or result in such stabilization or manipulation, or that
may reasonably be expected to facilitate the initial sale, or resale, of any
of the securities which are the subject of this Agreement.
(o) The Warrants to be issued to the Representative (the
"Underwriters' Unit Warrants") hereunder will be, when issued, duly and
validly authorized and executed by the Company and will constitute valid and
binding obligations of the Company, legally enforceable in accordance with
their terms (except as enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws pertaining
to creditors rights generally), and the Company will have duly authorized,
reserved and set aside the shares of its Common Stock issuable upon exercise
of the Underwriters' Unit Warrants and the underlying Warrants, (hereinafter
called the "Underwriters' Class A Warrants") and such stock, when issued and
paid for upon exercise of the Underwriters' Unit Warrants and the
Underwriters' Class A Warrants in accordance with the provisions thereof,
will be duly authorized and validly issued, fully-paid and non-assessable.
(p) All of the aforesaid representations, agreements, and
warranties shall survive delivery of, and payment for, the Units.
5
<PAGE>
SECTION 3. Issuance, Sale and Delivery of the Firm Units, the Optional
Units and the Underwriters' Unit Warrants.
(a) Upon the basis of the representations, warranties, covenants
and agreements of the Company herein contained, but subject to the terms and
conditions herein set forth, the Company agrees to issue to the several
Underwriters, and the Underwriters, severally and not jointly, agree to
purchase from the Company, the number of the Firm Units set forth opposite
the respective names of the Underwriters in Schedule I hereto, plus any
additional Units which such Underwriter may become obligated to purchase
pursuant to the provisions of Section 14 hereof.
The purchase price of the Units to be paid by the several
Underwriters shall be $5.40 per Unit ($6.00 per Unit less a ten percent
discount equal to $.60 per Unit).
In addition, and upon the same basis, and subject to the same
terms and conditions, Duncan Hill, Inc., the Company's sole stockholder,
hereby grants an option to you to purchase, but only for the purpose of
covering over-allotments, upon not less than two days' notice from the
Representative, the Optional Units, or any portion thereof, at the same price
per Unit as that set forth in the preceding sentence; and each Underwriter
agrees, severally and not jointly, to purchase Optional Units in the same
proportion in which it has agreed to purchase Firm Units. Notwithstanding
anything contained herein to the contrary, you individually and not as
Representative may provide in the Agreement Among Underwriters for the
Representative to purchase all or any part of the Optional Units and are not
obligated to offer the Optional Units to the other Underwriters. The
Optional Units may be exercised at any time, and from time to time,
thereafter within a period of 30 calendar days following the Effective Date.
The time(s) and date(s) (if any) so designated for delivery and payment for
the Optional Units shall be set forth in the notice to the Company. Such
dates are herein defined as the Additional Closing Date(s).
(b) Payment for the Firm Units shall be made by certified or
official bank checks in New York Clearing House funds, payable to the order
of the Company at the offices of the Representative, or its clearing agent,
or at such other place as shall be agreed upon by the Representative and the
Company, upon delivery of the Firm Units to the Representative for the
respective accounts of the Underwriters. In making payment to the Company
with respect to the Firm Units, the Representative may first deduct all sums
due to it for the balance of the non-accountable expense allowance and under
the Financial Advisory Agreement (as hereinafter defined). Such delivery and
payment shall be made at 9:30 A.M., New York City Time on ,
1998 (unless postponed in accordance with the provisions of Section 14
hereof) or at such other time as shall be agreed upon by the Representative
and the Company. The time and date of such delivery and payment are hereby
defined as the Closing Date. It is understood that each Underwriter has
authorized the Representative, for the account of such Underwriter, to accept
delivery of, receipt for, and make payment of the purchase price for, the
Firm Units which it has agreed to purchase. You, individually, and not as
Representative may (but shall not be obligated to) make payment of the
purchase price for the Firm Units to be purchased by any Underwriter whose
check shall not have been received by the Closing Date, for the account of
such Underwriter, but any such payment shall not relieve such Underwriter
from its obligations hereunder.
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(c) Payment for the Optional Units shall be made at the offices of
the Representative, or its clearing agent or at such other place as shall be
agreed upon by the Representative and the Company, in accordance with the
notice delivered pursuant to Section 3(a) which shall be no later than seven
business days from the expiration of the 30-day option period.
(d) Certificates for the Firm Units and for the Optional Units
shall be registered in such name or names and in such authorized
denominations as the Representative may request in writing at least two
business days prior to the Closing Date, and the Additional Closing Date(s)
(if any). The Company shall permit the Representative to examine and package
said certificates for delivery at least one full business day prior to the
Closing Date and prior to the Additional Closing Date(s). The Company shall
not be obligated to sell or deliver any of the Firm Units except upon tender
of payment by the Underwriters for all of the Firm Units agreed to be
purchased by them hereunder. The Representative, however, shall have the
sole discretion to determine the number of Optional Units, if any, to be
purchased.
(e) At the time of making payment for the Firm Units, the Company
also hereby agrees to sell to the Representative, Warrants to purchase 46,000
Units for an aggregate purchase price of $46 (hereinafter referred to as the
"Underwriters' Unit Warrants"). The 46,000 Units underlying the
Underwriters' Unit Warrants shall be identical to the Units sold to the
public except that the exercise price of the Underwriters' Class A Warrant
shall be at 150% of the then effective public exercise price of the Class A
Warrant included in the Units which is initially $7.875 per share (i.e. 150%
of $5.25). Each Underwriters' Unit Warrant shall entitle the owner thereof
to purchase one Unit of the Company at an exercise price of $9.00 per Unit
equal to 150% of the initial offering price of $6.00 per Unit. Such
Underwriters' Unit Warrants are to become exercisable one year from the
Effective Date, and shall remain exercisable for a period of four years
thereafter. From the Effective Date and until one (1) year thereafter, such
warrants may be transferred only to officers or partners of the Underwriters
and selling group members and their officers or partners.
The Underwriters' Unit Warrants shall contain customary
clauses protecting the holders thereof in the event the Company pays stock
dividends, effects stock splits, or effects a sale of assets, merger or
consolidation.
(f) On and subject to the Closing Date, the Company will give
irrevocable instructions to its transfer agent and Depository Trust Company
to deliver to the Representative (at the Company's expense) for a period of
five years from the Closing Date, daily transfer sheets showing any transfers
of the Units, Common Stock and Warrants and in the case of the transfer
agent, from time to time during the aforesaid period a complete stockholders'
list will be promptly furnished by the Company when requested by the
Representative on not more than two occasions per year.
SECTION 4. Public Offering. The several Underwriters agree, subject
to the terms and provisions of this Agreement, to offer the Units to the
public as soon as practicable after the Effective Date, at the initial
offering price of $6.00 per Unit and upon the terms described in the
Prospectus. The Representative may, from time to time, decrease the public
offering price, after the initial public
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offering, to such extent as the Representative may determine, however, such
decreases will not affect the price payable to the Company hereunder.
SECTION 5. Registration Statement and Prospectus. The Company will
furnish the Representative, without charge, two signed copies of the
Registration Statement and of each amendment thereto, including all exhibits
thereto and such amount of conformed copies of the Registration Statement and
Amendments as may be reasonably requested by the Representative for
distribution to each of the Underwriters and Selected Dealers.
The Company will furnish, at its expense, as many printed
copies of a Preliminary Prospectus and of the Prospectus as the
Representative may request for the purposes contemplated by this Agreement.
If, while the Prospectus is required to be delivered under the Act or the
Rules and Regulations, any event known to the Company relating to or
affecting the Company shall occur which should be set forth in a supplement
to or an amendment of the Prospectus in order to comply with the Act (or
other applicable law) or with the Rules and Regulations, the Company will
forthwith prepare, furnish and deliver to the Representative and to each of
the other Underwriters and to others whose names and addresses are designated
by the Representative, in each case at the Company's expense, a reasonable
number of copies of such supplement or supplements to or amendment or
amendments of, the Prospectus.
The Company authorizes the Underwriters and the selected
dealers, if any, in connection with the distribution of the Units and all
dealers to whom any of the Units may be sold by the Underwriters or by any
participating broker-dealer ("Selected Dealer") to use the Prospectus, as
from time to time amended or supplemented, in connection with the offering
and sale of the Units and in accordance with the applicable provisions of the
Act and the applicable Rules and Regulations and applicable State securities
laws.
SECTION 6. Covenants of the Company. The Company covenants and
agrees with each Underwriter that:
(a) After the date hereof, the Company will not at any time,
whether before or after the Effective Date, file any amendment to the
Registration Statement or the Prospectus, or any supplement to the
Prospectus, of which the Representative shall not previously have been
advised and furnished with a copy, or to which the Representative or the
Underwriters' counsel shall have reasonably objected in writing on the ground
that it is not in compliance with the Act or the Rules and Regulations.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective (provided, however, the Company
shall not cause the Registration Statement to become effective without the
written consent of VTR) and will advise the Representative: (i) when the
Registration Statement shall have become effective and when any amendment
thereto shall have become effective, and when any amendment of or supplement
to the Prospectus shall be filed with
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the Commission; (ii) when the Commission shall make request or suggestion for
any amendment to the Registration Statement or the Prospectus or for
additional information and the nature and substance thereof; and (iii) of the
issuance by the Commission of an order suspending the effectiveness of the
Registration Statement or of the initiation of any proceedings for that
purpose, and will use its best efforts to prevent the issuance of such an
order, or if such an order shall be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will prepare and file with the Commission,
promptly upon the request of the Representative, such amendments, or
supplements to the Registration Statement or Prospectus, in form and
substance satisfactory to counsel to the Company, as in the reasonable
opinion of Mintz & Gold LLP, as counsel to the Underwriters, may be necessary
or advisable in connection with the offering or distribution of the Units,
and will diligently use its best efforts to cause the same to become
effective.
(d) The Company will, at its expense, when and as requested by the
Representative, supply all necessary documents, exhibits and information, and
execute all such applications, instruments and papers as may be required, in
the opinion of the Underwriters' counsel, to qualify the Units or such part
thereof as the Representative may determine, for sale under the so-called
"Blue Sky" Laws of such states as the Representative shall designate, and to
continue such qualification in effect so long as required for the purposes of
the distribution of the Units, provided, however, that the Company shall not
be required to qualify as a foreign corporation or dealer in securities or to
file a consent to service of process in any state in any action other than
one arising out of the offering or sale of the Units.
(e) The Company will, at its own expense, file and provide, and
continue to file and provide, such reports, financial statements and other
information as may be required by the Commission, or the proper public bodies
of the States in which the Units may be qualified for sale, for so long as
required by applicable law, rule or regulation and will provide the
Representative with copies of all such registrations, filings and reports on
a timely basis.
(f) During the period of five years from the Effective Date, the
Company will deliver to the Underwriter a copy of each annual report of the
Company, and will deliver to the Underwriter: (i) within 50 days after the
end of each of the Company's first three quarter-yearly fiscal periods, a
balance sheet of the Company as at the end of such quarter-yearly period,
together with a statement of its income and a statement of changes in its
cash flow for such period (Form 10-Q or 10-QSB), all in reasonable detail,
signed by its principal financial or accounting officer; (ii) within 105 days
after the end of each fiscal year, a balance sheet of the Company as at the
end of such fiscal year, together with a statement of its income and
statement of cash flow for such fiscal year (Form 10-K or 10-KSB), such
balance sheet and statement of cash flow for such fiscal year to be in
reasonable detail and to be accompanied by a certificate or report of
independent public accountants, (who may be the regular accountants for the
Company); (iii) as soon as available a copy of every other report (financial
or other) mailed to the stockholders; and (iv) as soon as available a copy of
every non-confidential report and financial statement furnished to or filed
with the Commission or with any securities exchange pursuant to requirements
by or agreement with such exchange or the Commission pursuant to the
Securities Exchange Act of 1934, as amended (the "1934 Act"), or any
regulations of the Commission thereunder. If and for so long as the Company
has one or more active
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subsidiaries, the financial statements required by (i) and (ii) above shall
be furnished on a consolidated basis in respect of the Company and all of the
Company's subsidiaries. The financial statements referred to in (ii) shall
also be furnished to all of the stockholders of the Company as soon as
practicable after the 105 days referred to therein.
(g) Following the Effective Date, the Company shall comply with all
periodic reporting requirements imposed by the Commission pursuant to the
1934 Act, and shall promptly furnish you with copies of all material filed
with the Commission pursuant to the 1934 Act or otherwise furnished to
shareholders of the Company.
(h) The Company will make generally available to its security
holders, as soon as practicable, but in no event later than 15 months after
the Effective Date, an earnings statement of the Company (which need not be
audited) in reasonable detail, covering a period of at least twelve months
beginning after the Effective Date, which earnings statement shall satisfy
the provisions of Section 11(a) of the Act.
(i) The Company will, on or about the Effective Date, apply
for (or maintain) listing in Standard and Poor's Corporation Records and
Standard & Poor's Monthly Stock Guide and shall use its best efforts to have
the Company listed in such reports for a period of not less than five (5)
years from the Closing Date. The Company will request accelerated treatment
in the Daily News Supplement of Standard and Poor's Corporation Records.
(j) The Company shall employ the services of an auditing firm
acceptable to the Representative in connection with the preparation of the
financial statements required to be included in the Registration Statement
and shall continue to appoint such auditors or such other auditors as are
reasonably acceptable to the Representative for a period of five (5) years
following the Effective Date of the Registration Statement. Said financial
statements shall be prepared in accordance with Regulation S-X and/or S-B, as
applicable, under the General Rules and Regulations of the 1933 Act. The
firm of Hausser + Taylor LLP are deemed acceptable to the Underwriter. The
Company shall appoint Harris Trust Company transfer agent (the "Transfer
Agent") for the Common Stock and as Warrant Agent for the Warrants.
(k) As soon as practicable after the Closing Date, the Company
will deliver to the Representative and its counsel a total of two bound
volumes of copies of all documents relating to the public offering which is
the subject of this Agreement.
(l) The Company's officers, directors and Duncan Hill, Inc. have
agreed not to sell, transfer, hypothecate or otherwise dispose of any Common
Stock, Warrants or other securities of the Company for a period of twenty
four (24) months following the Effective Date without the prior written
consent of the Representative. Notwithstanding the foregoing, as disclosed
in the Prospectus, William Miller shall be permitted to resell 200 Warrants
and/or the shares of Common Stock issuable upon their exercise, and Duncan
Hill, Inc., shall be permitted to sell up to 69,000 Units.
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(m) Prior to the Effective Date, the Company shall have an
outstanding capitalization consisting of no more than 1,000,000 shares of
Common Stock, 5,000,000 shares of Series A Non-convertible Preferred Stock,
1,100,000 shares of Series B Preferred Stock convertible into an aggregate of
1,100,000 shares of Common Stock, notes automatically convertible into
400,000 shares of Common Stock and 1,400,000 Class A Warrants upon completion
of this Offering, Warrants automatically convertible into 338,000 Class A
Warrants upon the completion of this Offering, options to purchase 260,000
shares of Common Stock and zero options granted under the Company's 1997
Long-Term Stock Incentive Plan. From the Effective Date until two years
after the Closing Date, the Company shall not without the Representative's
prior written consent, which consent shall not be unreasonably withheld,
issue additional shares of stock, Common or Preferred, Options exercisable
into shares of stock, Common or Preferred, or Debentures or other debt
securities which are convertible into stock, Common or Preferred except as
follows: (i) securities issuable in connection with the Form SB-2
Registration Statement (file no. 333-45863); (ii) shares of Common Stock
issuable upon exercise of presently outstanding Class A Warrants; (iii)
shares of Common Stock and Warrants issuable upon conversion of an
outstanding bridge lender convertible note; (iv) shares of Common Stock
issuable pursuant to the Company's current stock option plan; and (v) shares
of Common Stock issuable in connection with mergers and acquisitions and up
to 50,000 shares that may be granted to employees provided that none of the
shares pursuant to this exception (v) may be sold or otherwise transferred
until two (2) years after the Effective Date.
(n) Prior to the Effective Date, the Company: (i) shall have
obtained key person life insurance on the life of William Miller in the
amount of $1,000,000, payable to the Company, to be kept in effect for at
least three (3) years following the Effective Date; and (ii) the employment
agreement with Mr. Miller disclosed in the Registration Statement shall be in
full force and effect.
(o) The Representative shall have the right to designate one (1)
person to serve on the Company's Board of Directors and upon such nomination
the Board shall take the action necessary to cause the representative's
nominee to be elected to the Board for a period of three (3) years following
the Effective Date. If the Representative does not exercise this right, it
may appoint an advisor, who will be entitled to attend all meetings of the
Board of Directors for a period of three (3) years following the Effective
Date.
SECTION 7. Expenses of the Company.
The Company shall be responsible for and shall bear all expenses
directly and necessarily incurred in connection with the proposed financing,
including: (i) the preparation, printing and filing of the Registration
Statement and amendments thereto, including NASD and SEC filing fees,
preliminary and final Prospectus and the printing of the Underwriting
Agreement, the Agreement Among the Underwriters and the Selected Dealers'
Agreement, a Blue Sky Memorandum and material to be circulated to the
Underwriters by us; (ii) the placement of "tombstone" advertisements; (iii)
the issuance and delivery of certificates representing the Common Stock and
Warrants including original issue and transfer taxes, if any; (iv) the
qualifications of the Company's Units (covered by the "firm commitment"
offering) under State securities or "Blue Sky" laws, including counsel fees
of Mintz & Gold, LLP relating thereto in the sum of Thirty Thousand ($30,000)
Dollars ($15,000 of which has been paid, together with appropriate state
filing fees) plus disbursements relating to, but
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not limited to, long-distance telephone calls, photocopying, messengers,
excess postage, overnight mail and courier services; (v) the fees and
disbursements of counsel for the Company and the accountants for the Company;
and (vi) the listing of the securities being offered herein on the OTC
Bulletin Board. Upon the commencement of the necessary state Blue Sky
filings by our counsel, the Company shall supply them at their request, all
necessary state filing fees.
SECTION 8. Payment of Underwriters' Expenses.
On the Closing Date and Additional Closing Date(s) (if any)
the Company will pay to you an expense allowance equal to three (3%) percent
of the total gross proceeds derived from the public offering contemplated by
this Agreement for the fees and disbursements of counsel to the Underwriters
and for costs of otherwise unreimbursed advertising, traveling, postage,
telephone and telegraph expenses and other miscellaneous expenses incurred by
or on behalf of the Representative and the Underwriters in preparation for,
or in connection with the offering and sale and distribution of the Units;
and you shall not be obligated to account to the Company for such
disbursements and expenses.
SECTION 9. Indemnification.
(a) The Company agrees to indemnify and hold harmless each of the
Underwriters, and each person who controls each of the Underwriters within
the meaning of Section 15 of the Act, from and against any and all losses,
claims, damages, expenses, or liabilities, joint or several, to which they or
any of them may become subject under the Act or any other statute or at
common law or otherwise, and to reimburse persons indemnified as above for
any reasonable legal or other expense (including the cost of any
investigation and preparation) incurred by them (as incurred), or any of
them, in connection with investigating, defending against or appearing as a
third party witness in connection with any claim or litigation, whether or
not resulting in any liability, but only insofar as such losses, claims,
liabilities, expenses or litigation arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus (as amended or supplemented, if
amended or supplemented), or in any "Blue Sky" application, or arising out of
or based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they are
made, not misleading; provided, however, that the indemnity agreement
contained in this subsection (a) shall not apply to amounts paid in
settlement of any such claims or litigation if such settlement is effected
without the consent of the Company, nor shall it apply to the Underwriters or
any person controlling the Underwriters in respect of any such losses,
claims, damages, expenses, liabilities or litigation arising out of, or based
upon, any such untrue statement or alleged untrue statement, or any such
omission or alleged omission, if such statement or omission was made in
reliance upon and in conformity with written information furnished in writing
to the Company by such Underwriter, or on its behalf, specifically for use
in connection with the preparation of the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto or any such
"Blue Sky" application.
(b) Each of the Underwriters severally agrees, in the same manner
and to the same extent as set forth in subsection (a) above, to indemnify and
hold harmless the Company, each of the
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directors and officers who have signed the Registration Statement and each
person, if any, who controls the Company within the meaning of Section 15 of
the Act, with respect to any statement in or omission from the Registration
Statement, or the Prospectus (as amended or as supplemented, if amended or
supplemented), or in any "Blue Sky" application, if such statement or
omission was made in reliance upon and in conformity with written information
furnished in writing to the Company by such Underwriter, or on its behalf,
specifically for use in connection with the preparation of the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto, or any such application. An Underwriter shall not be liable for
amounts paid in settlement of any such claim or litigation if such settlement
was effected without its consent.
(c) Each indemnified party shall give prompt notice to each
indemnifying party of any claim asserted against it and of any action
commenced against it in respect of which indemnity may be sought hereunder.
The omission to so notify an indemnifying party shall relieve such party of
its obligation to indemnify pursuant to this Agreement, but failure to so
notify an indemnifying party shall not relieve it from any liability which it
may have otherwise than on account of this indemnity agreement. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, subject to the provisions herein stated, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 9 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses
of such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel
reasonably satisfactory to the indemnified party; provided that the fees and
expenses of such counsel shall be at the expense of the indemnifying party
if: (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party; or (ii) the defendants in any such action
include both the indemnified and the indemnifying party and the indemnified
party shall have reasonably concluded that there may be a conflict between
the positions of the indemnifying party and the indemnified party in
conducting the defense of any such action or that there may be legal defenses
available to it and/or other indemnified parties which are different from or
additional to those available to the indemnifying party (in which case the
indemnifying party shall not have the right to assume the defense of such
action on behalf of such indemnified party or parties), it being understood,
however, that the indemnifying party shall not, in connection with any one
such action or separate but substantially similar or related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than
one separate firm of attorneys for the indemnified party which firm shall be
designated in writing by the indemnified party.
(d) The respective indemnity agreements between the Underwriters
and the Company contained in subsections (a) and (b) above, and the
representations and warranties of the Company set forth in Section 2 hereof
or elsewhere in this Agreement, shall remain operative and in full force and
effect, regardless of any investigation made by or on behalf of the
Underwriters or by
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or on behalf of any controlling person of the Underwriters or the Company or
any such officer or director or any controlling person of the Company, and
shall survive the delivery of the Units. Any successor of the Company, or of
the Underwriters, or of any controlling person of the Underwriters or the
Company, as the case may be, shall be entitled to the benefit of such
respective indemnity agreements.
(e) In order to provide for just and equitable contribution under
the Act in any case in which: (i) any person entitled to indemnification
under this Section 9 makes claim for indemnification pursuant hereto but it
is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 9 provides
for indemnification in such case; or (ii) contribution under the Act may be
required on the part of any such person in circumstances for which
indemnification is provided under this Section 9, then, and in each such
case, the Company and the Underwriters shall contribute to the aggregate
losses, claims, damages, expenses or liabilities to which they may be subject
(after any contribution from others) in such proportions so that the
Underwriters are responsible in the aggregate for the proportion of such
losses, claims, damages or liabilities represented by the percentage that the
underwriting discounts and commissions appearing on the cover page of the
Prospectus bears to the public offering price appearing thereon, and the
Company is responsible for the remaining portion; provided, that, in any such
case, no person guilty of a fraudulent misrepresentation (within the meaning
of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
Within twenty days after receipt by any party to this Agreement (or its
representative) of notice of the commencement of any action, suit or
proceeding, such party will, if a claim for contribution in respect thereof
is to be made against another party (the "contributing party"), notify the
contributing party, in writing, of the commencement thereof, but the omission
so to notify the contributing party will not relieve it from any liability
which it may have to any other party other than for contribution hereunder.
In case any such action, suit or proceeding is brought against any party, and
such party so notifies a contributing party or his or its representative of
the commencement thereof within the aforesaid twenty days, the contributing
party will be entitled to participate therein with the notifying party and
any other contributing party similarly notified. Any such contributing party
shall not be liable to any party seeking contribution on account of any
settlement of any claim, action or proceeding effected by such party seeking
contribution without the written consent of such contributing party. The
contribution provisions contained in this Section 9 are in addition to any
other rights or remedies which either party hereto may have with respect to
the other or hereunder.
SECTION 10. Effectiveness of Agreement. This Agreement shall become
effective: (i) at 10:00 A.M., New York Time, on the first full business day
after the Effective Date; or (ii) at the time of the initial public offering
by the Underwriters of the Units, whichever shall first occur. The time of
the initial public offering by the Underwriters of the Units for the purposes
of this Section 10, shall mean the time, after the Registration Statement
becomes effective, of the release by the Representative for publication of
the first newspaper advertisement which is subsequently published relating to
the Units, or the time, after the Registration Statement becomes effective,
when the Units are first released by the Representative for offering by the
Underwriters or dealers by letter or
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telegram, whichever shall first occur. The Representative agrees to notify
the Company immediately after it shall have taken any action, by release or
otherwise, whereby this Agreement shall have become effective. This
Agreement shall, nevertheless, become effective at such time earlier than the
time specified above, after the Effective Date, as the Representative may
determine by notice to the Company.
SECTION 11. Conditions of the Underwriters' Obligations. The
obligations of the several Underwriters to purchase and pay for the Units
which the Underwriters have agreed to purchase hereunder are subject to: the
accuracy, as of the date hereof and as of the Closing Date and the Additional
Closing Date(s), if any, (together, the "Closing Dates"), of all of the
representations and warranties of the Company contained in this Agreement;
the Company's compliance with, or performance of, all of its covenants,
undertakings and agreements contained in this Agreement that are required to
be complied with or performed on or prior to each of the Closing Dates and to
the following additional conditions:
(a) On or prior to the Closing Date, no order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or be pending or, to
the knowledge of the Company, shall be threatened by the Commission; any
request for additional information on the part of the Commission (to be
included in the Registration Statement or the Prospectus or otherwise) shall
have been complied with to the satisfaction of the Commission; and neither
the Registration Statement nor any amendment thereto shall have been filed to
which counsel to the Underwriters shall have reasonably objected, in writing.
(b) The Representative shall not have disclosed in writing to the
Company that the Registration Statement or Prospectus or any amendment or
supplement thereto contained, as of the date thereof, an untrue statement of
a fact which, in the opinion of counsel to the Underwriters, is material, or
omits to state a fact which, in the opinion of such counsel, is material and
is required to be stated therein, or is necessary to make the statements
therein not materially misleading.
(c) Between the date hereof and the Closing Date, the Company
shall not have sustained any loss on account of fire, explosion, flood,
accident, calamity or other cause, of such character as materially adversely
affects its business or property, whether or not such loss is covered by
insurance.
(d) Between the date hereof and the Closing Date, there shall be
no material litigation instituted or threatened against the Company, and
there shall be no proceeding instituted or, to the knowledge of the Company,
threatened against the Company before or by any federal or state commission,
regulatory body or administrative agency or other governmental body, domestic
or foreign, wherein an unfavorable ruling, decision or finding would
materially adversely affect the business, licenses, permits, operations or
financial condition or income of the Company.
(e) Except as contemplated herein or as set forth in the
Registration Statement and Prospectus, during the period subsequent to the
Effective Date and prior to the Closing Date, (A) the Company shall have
conducted its business in the usual and ordinary manner as the same was being
conducted on the date of the filing of the initial Registration Statement and
(B) except in the ordinary
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<PAGE>
course of its business, the Company shall not have incurred any material
liabilities or obligations (direct or contingent), or disposed of any of its
assets, or entered into any material transaction, and (C) the Company shall
not have suffered or experienced any material adverse change in its business,
affairs or in its condition, financial or otherwise. On the Closing Date, the
capital stock and surplus accounts of the Company shall be substantially as
great as at its last financial report without considering the proceeds from
the sale of the Units except to the extent that any decrease is disclosed in
or contemplated by the Prospectus.
(f) The authorization of the Units, the Common Stock and the
Warrants, the Registration Statement, the Prospectus and all corporate
proceedings and other legal matters incident thereto and to this Agreement,
shall be reasonably satisfactory in all respects to counsel to the
Underwriters.
(g) The Company shall have furnished to the Representative the
opinions, dated the Closing Date, and Additional Closing Date(s), addressed
to you, of its counsel in the form attached hereto as Exhibit A.
In rendering such opinion, such counsel may rely upon certificates
of any officer of the Company or public officials as to matters of fact.
(h) The Company shall have furnished to the Representative
certificates of the President of the Company, dated as of the Closing Date,
and Additional Closing Date(s), to the effect that:
(i) Each of the representations and warranties of the Company
contained in Section 2 hereof is true and correct in all material respects at
and as of such Closing Date, and the Company has performed or complied with
all of its agreements, covenants and undertakings contained in this Agreement
and has performed or satisfied all the conditions contained in this Agreement
on its part to be performed or satisfied at the Closing Date;
(ii) The Registration Statement has become effective and no
order suspending the effectiveness of the Registration Statement has been
issued, and, to the best of the knowledge of the respective signers, no
proceeding for that purpose has been initiated or is threatened by the
Commission;
(iii) The respective signers have each carefully examined the
Registration Statement and the Prospectus and any amendments and supplements
thereto, and to the best of their knowledge the Registration Statement and
the Prospectus and any amendments and supplements thereto and all statements
contained therein are true and correct in all material respects, and neither
the Registration Statement nor the Prospectus nor any amendment or supplement
thereto includes any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading and, since the effective date of the
Registration Statement, there has occurred no event required to be set forth
in an amended or supplemented Prospectus which has not been so set forth
except changes which the Registration Statement and Prospectus indicate might
occur.
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(iv) Except as set forth or contemplated in the Registration
Statement and Prospectus, since the respective dates as of which, or periods
for which, information is given in the Registration Statement and Prospectus
and prior to the date of such certificate: (A) there has not been any
material adverse change, financial or otherwise, in the business, business
prospects, earnings, general affairs or condition (financial or otherwise),
of the Company (in each case whether or not arising in the ordinary course of
business); and (B) the Company has not incurred any material liabilities,
direct or contingent, or entered into any material transactions, otherwise
than in the ordinary course of business other than as referred to in the
Registration Statement or Prospectus and except changes which the
Registration Statement and Prospectus indicate might occur.
(i) The Company shall have furnished to the Representative on the
Closing Date, such other certificates of executive officers of the Company
additional to those specifically mentioned herein, as the Representative may
have reasonably requested, as to: the accuracy and completeness of any
statement in the Registration Statement or the Prospectus, or in any
amendment or supplement thereto; the representations and warranties of the
Company herein; the performance by the Company of its obligations hereunder;
or the fulfillment of the conditions concurrent and precedent to the
obligations of the Underwriters hereunder, which are required to be performed
or fulfilled on or prior to the Closing Date.
(j) At the time this Agreement is executed, and on each Closing
Date you shall have received a letter from Hausser + Taylor LLP addressed to
the Representative, as Representative of the Underwriters, and dated,
respectively, as of the date of this Agreement and as of each Closing Date in
form and substance reasonably satisfactory to the Representative, to the
effect that:
(i) They are independent public accountants within the meaning
of the Act and the applicable published Rules and Regulations of the
Commission;
(ii) In their opinion, the financial statements and related
schedules of the Company included in the Registration Statement and
Prospectus and covered by their reports comply as to form in all material
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations of the Commission issued thereunder;
(iii) On the basis of limited procedures in accordance with
standards established by the American Institute of Certified Public
Accountants, including (1) a reading of the latest available financial
statements of the Company (a copy of which shall be attached to such letter),
(2) a reading of the latest available minutes of the meetings of the
stockholders and the Board of Directors of the Company as set forth in the
minute books of the Company, officials of the Company having advised you and
them that the minutes of all such meetings through that date were set forth
therein, (3) consultations with officials of the Company responsible for
financial and accounting matters of the Company, which procedures do not
constitute an examination in accordance with generally accepted accounting
standards, and would not necessarily reveal material adverse changes in the
financial position or results of operations or inconsistencies in the
application of generally accepted accounting principles, nothing has come to
their attention which in their judgment would lead them to believe that: (a)
the unaudited financial statements and related schedules of the Company
included in the Registration Statement and Prospectus do not comply as to
form in all material
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<PAGE>
respects with the applicable accounting requirements of the Act and the
published Rules and Regulations of the Commission issued thereunder, or were
not prepared in accordance with generally accepted accounting principles and
practices consistent in all material respects with those followed in the
preparation of the comparable financial statements and schedules covered by
their reports included in the Registration Statement and Prospectus, or would
require any material adjustments for a fair presentation of the information
purported to be shown thereby; (b) during the period from the date of the
Capitalization table included in the Prospectus to a specified date not more
than four business days prior to the date of such letter, there has been any
material change in the capital stock or debt of the Company; or (c) during
the period from the date of the latest balance sheet and related statements
of operations, changes in stockholders' equity and changes in financial
position included in the Prospectus and covered by their reports contained
therein to the date of the letter, there has been any material adverse change
in the financial condition, or results of operations, of the Company; and
(iv) In addition to the examination referred to in their
reports included in the Registration Statement and the Prospectus and the
limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to
certain amounts, percentages and financial information which are derived from
the general accounting records of the Company which appear in the Prospectus
under the captions "Capitalization", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Executive Compensation",
"Certain Transactions", "Selected Financial Data," "Dilution," and "Risk
Factors," as well as such other financial and/or numerical information as may
be specified by the Representative, and that they have compared such amounts,
percentages and financial information with the accounting records of the
Company and have found them to be in agreement.
All the opinions, letters, certificates and evidence mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel to the Underwriters, whose approval shall not be
unreasonably withheld, conditioned or delayed.
If any of the conditions specified in this Section shall not have
been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement and all obligations of the Underwriters hereunder may be terminated
and canceled by the Representative by notifying the Company of such
termination and cancellation in writing or by telegram at any time prior to,
or on, the Closing Date and any such termination and cancellation shall be
without liability of any party hereto to any other party, except with respect
to the provisions of Sections 7 and 8 hereof. The Representative may, of
course, waive, in writing, any conditions which have not been fulfilled or
extend the time for their fulfillment.
SECTION 12. Termination.
(a) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time before it becomes
effective pursuant to Section 10.
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(b) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company, at any time after it becomes
effective, in the event that the Company, after notice from the
Representative and an opportunity to cure, shall have failed or been unable
to comply with any of the material terms, conditions or provisions of this
Agreement on the part of the Company to be performed, complied with or
fulfilled within the respective times herein provided for, including without
limitation Section 6(g) hereof, unless compliance therewith or performance or
satisfaction thereof shall have been expressly waived by the Representative
in writing. This Agreement may also be terminated if: (i) qualifications are
received or provided by the Company's independent public accountants or
attorneys to the effect of either inabilities in furnishing certifications as
to material items including, without limitation, information contained within
the footnotes to the financial statements, or as affecting matters incident
to the issuance and sale of the securities contemplated or as to corporate
proceedings or other matters; or (ii) there is any action, suit or
proceeding, threatened or pending, at law or equity against the Company, or
by any Federal, State or other commission, board or agency wherein any
unfavorable result or decision could materially adversely affect the
business, property, or financial condition of the Company which was not
disclosed in the Prospectus.
(c) This Agreement may be terminated by the Representative by
written or telegraphic notice to the Company at any time after it becomes
effective, if the offering of, or the sale of, or the payment for, or the
delivery of, the Units is rendered impracticable or inadvisable because: (i)
additional material governmental restriction, not in force and effect on the
date hereof, shall have been imposed upon trading in securities generally or
minimum or maximum prices shall have been generally established on the New
York Stock Exchange or trading in securities generally on such exchange shall
have been suspended or a general banking moratorium shall have been
established by Federal or New York State authorities; (ii) the condition of
the market for securities in general shall have materially and adversely
changed; or (iii) the condition of any undisclosed matter materially
affecting the Company or its business or business prospects, is such that it
would be undesirable, impractical or inadvisable to proceed with, or
consummate, this Agreement or the public offering of the Units.
(d) Any termination of this Agreement pursuant to this Section 12
shall be without liability of any character (including, but not limited to,
loss of anticipated profits or consequential damages) on the part of any
party hereto, except that the Company shall remain obligated to pay the costs
and expenses provided to be paid by it specified in Sections 6, 7 and 8, to
the extent therein provided. In addition, the Underwriter shall account to
the Company for any advance and shall reimburse the Company for any portion
of the advance not expended for actual out-of-pocket expenses.
SECTION 13. Finder. The Company and the Underwriters mutually
represent that they know of no person who rendered any service in connection
with the introduction of the Company to the Underwriters and that they know
of no claim by anyone for a "finder's fee" or similar type of fee, in
connection with the public offering which is the subject of this Agreement.
Each party hereby indemnifies the other against any such claims by any person
known to it, and not known to the other party hereto, who shall claim to have
rendered services in connection with the introduction of the Company to the
Underwriters and/or to have such a claim.
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<PAGE>
SECTION 14. Substitution of Underwriters.
(a) If one or more Underwriters default in its or their
obligations to purchase and pay for Units hereunder and if the aggregate
amount of such Units which all Underwriters so defaulting have agreed to
purchase does not exceed 10% of the aggregate number of Units constituting
the Units, the non-defaulting Underwriters shall have the right and shall be
obligated severally to purchase and pay for (in addition to the Units set
forth opposite their names in Schedule I) the full amount of the Units agreed
to be purchased by all such defaulting Underwriters and not so purchased, in
proportion to their respective commitments hereunder. In such event the
Representative, for the accounts of the several non-defaulting Underwriters,
may take up and pay for all or any part of such additional Units to be
purchased by each such Underwriter under this subsection (a), and may
postpone the Closing Date to a time not exceeding seven full business days;
or
(b) If one or more Underwriters (other than the Representative)
default in its or their obligations to purchase and pay for the Units
hereunder and if the aggregate amount of such Units which all Underwriters so
defaulting shall have agreed to purchase shall exceed 10% of the aggregate
number of Units, or if one or more Underwriters for any reason permitted
hereunder cancel its or their obligations to purchase and pay for Units
hereunder, the non-canceling and non-defaulting Underwriters (hereinafter
called the "Remaining Underwriters") shall have the right, but shall not be
obligated to purchase such Units in such proportion as may be agreed among
them, at the Closing Date. If the Remaining Underwriters do not purchase and
pay for such Units at such Closing Date, the Closing Date shall be postponed
for one business day and the remaining Underwriters shall have the right to
purchase such Units, or to substitute another person or persons to purchase
the same or both, at such postponed Closing Date. If purchasers shall not
have been found for such Units by such postponed Closing Date, the Closing
Date shall be postponed for a further two business days and the Company shall
have the right to substitute another person or persons, satisfactory to you
to purchase such Units at such second postponed Closing Date. If the Company
shall not have found such purchasers for such Units by such second postponed
Closing Date, then this Agreement shall automatically terminate and neither
the Company nor the remaining Underwriters (including the Representative)
shall be under any obligation under this Agreement (except that the Company
shall remain liable to the extent provided in Section 7 hereof). As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section 14. Nothing in this subparagraph (b) will
relieve a defaulting Underwriter from its liability, if any, to the other
Underwriters for damages occasioned by its default hereunder (and such
damages shall be deemed to include, without limitation, all expenses
reasonably incurred by each Underwriter in connection with the proposed
purchase and sale of the Units) or obligate any Underwriter to purchase or
find purchasers for any Units in excess of those agreed to be purchased by
such Underwriter under the terms of Sections 3 and 14 hereof.
SECTION 15. Registration of the Underwriters' Unit Warrants and
Underwriters' Class A Warrants. The Company agrees that it will, upon
request by the Representative or the
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holders of a majority of the Underwriters' Unit Warrants and Underlying
Securities (i.e. Underwriters' Class A Warrants and shares of Common Stock
issuable upon exercise thereof) within the period commencing one year after
the Effective Date, and for a period of five years from the Effective Date,
on one occasion only at the Company's sole expense, cause the Underwriters'
Unit Warrants and/or the Underlying Securities issuable upon exercise of the
Underwriters' Unit Warrants, to be the subject of a post-effective amendment,
a new Registration Statement, if appropriate (hereinafter referred to as the
"Demand Registration Statement"), so as to enable the Representative and/or
its assigns to offer publicly the Underwriters' Unit Warrants and/or the
Underlying Securities. The Company agrees to register such securities
expeditiously and, where possible, within forty-five (45) business days after
receipt of such requests. The Company agrees to use its "best efforts" to
cause the post-effective amendment, new Registration Statement to become
effective and for a period of nine (9) months thereafter to reflect in the
post-effective amendment, new Registration Statement, financial statements
which are prepared in accordance with Section 10(a)(3) of the Act and any
facts or events arising which, individually or in the aggregate, represent a
fundamental and/or material change in the information set forth in such
post-effective amendment or new Registration Statement. The holders of the
Underwriters' Unit Warrants may demand registration without exercising such
Warrants and, in fact, are never required to exercise same.
The Company understands and will agree that if, at any time within
the period commencing one year after the Effective Date and ending seven
years after the Effective Date of the Company's Registration Statement, it
should file a Registration Statement with the Commission pursuant to the
Securities Act, regardless of whether some of the holders of the
Underwriters' Unit Warrants and Underlying Securities shall have theretofore
availed themselves of the right provided above, the Company, at its own
expense, will offer to said holders the opportunity to register the
Underwriters' Unit Warrants and Underlying Securities. This paragraph is not
applicable to a Registration Statement filed by the Commission with the
Commission on Form S-8 or any other inappropriate form.
In addition to the rights above provided, the Company will
cooperate with the then holders of the Underwriters' Unit Warrants and
Underlying Securities in preparing and signing a Registration Statement, on
one occasion only in addition to the Registration Statements discussed above,
required in order to sell or transfer the aforesaid Underwriters' Unit
Warrants and Underlying Securities and will supply all information required
therefor, but such additional Registration Statement shall be at the then
Holders' cost and expense unless the Company elects to register additional
shares of the Company's Common Stock in which case the cost and expense of
such Registration Statement will be prorated between the Company and the
Holders of the Underwriters' Unit Warrants and Underlying Securities
according to the aggregate sales price of the securities being issued. The
Holders of the Underwriters' Unit Warrants may include such Warrants in any
such filing without exercising the Underwriters' Unit Warrants, and in fact,
are never required to exercise same. The Company can, at any time for any
reason, withdraw any such registration except in connection with a
Registration Statement filed pursuant to the Company's demand Registration
Statement.
SECTION 16. Other Agreements.
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(a) On the Effective Date, the Company will enter into an
agreement (the "Financial Advisory Agreement") retaining the Representative
as a financial advisor pursuant to which the Representative shall receive a
consulting fee in an amount equal to $50,000 per year or a total of $100,000
for services for two (2) year from the Effective Date, payable in full in
advance on the Closing Date, which shall include, but not be limited to,
advising the Company in connection with possible acquisition opportunities,
advising the Company regarding shareholder relations including the
preparation of the annual report and other releases, assisting in long-term
financial planning, advice in connection with corporate re-organizations and
expansion and capital structure, and other financial assistance.
(b) The Company agrees to file with the NASD all post-effective
amendments or prospectus supplements, if any, disclosing actual price and
selling terms by the selling security holders at the same time they are filed
with the Commission and in the event a portion of the securities being
registered on behalf of selling security holders become underwritten, that
prior to commencement of the distribution: (i) copies of all underwriting
documents proposed for use will be submitted to the NASD for review by the
Underwriter; and (ii) the maximum compensation to be paid will be approved by
the Department. To the extent the Company receives notification from a
related shareholder, the Company will notify the Representative and the NASD
if subsequent to the filing of this offering any 5% or greater shareholder of
the Company is or becomes an affiliate or associated person of an NASD member
participating in the distribution in this offering.
(c) If the Company shall within five (5) years from the Effective
Date, enter into any agreement or understanding with any person or entity
introduced by the Representative involving: (i) the sale of all or
substantially all of the assets and properties of the Company; (ii) the
merger or consolidation of the Company (other than a merger or consolidation
effected for the purpose of changing the Company's domicile); or (iii) the
acquisition by the Company of the assets or stock of another business entity,
which agreement or understanding is thereafter consummated, whether or not
during such five (5) year period, the Company, upon such consummation, shall
pay to the Representative an amount equal to the following percentages of the
consideration paid by the Company in connection with such transaction:
5% of the first $4,000,000 or portion thereof, of such consideration;
4% of the next $1,000,000 or portion thereof, of such consideration;
3% of the next $1,000,00 or portion thereof, of such consideration;
and
2% of such consideration in excess of the first $6,000,000 of such
consideration.
The fee payable to the Representative will be in the same form of
consideration as that paid by or to the Company, as the case may be, in any
such transactions.
(d) Commencing twelve months after the Effective Date, the Company
will pay the Representative as its Warrant solicitation agent an amount equal
to five percent (5%) of the aggregate exercise price of each Class A Warrant
exercised provided: (1) the market price of the Common Stock on the date
the Warrant was exercised was greater than the Warrant exercise price
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on that date; (2) exercise of the Warrant was solicited by a member of the
NASD and the NASD member is designated in writing by the Warrant holder; (3)
the Warrant was not held in a discretionary account or prior specific written
approval was obtained from the related customer ; (4) disclosure of
compensation arrangements was made both at the time of the offering and at
the time of exercise of the Warrant; (5) the solicitation of the exercise of
the Warrant was not in violation of Regulation M promulgated under the
Exchange Act; and (6) solicitation is in compliance with NASD Notice to
Members 81-38. The Company agrees to pay over to the Representative any fees
due it within five business days after receipt by the Company of Warrant
proceeds. Within ten (10) days of the last day of each month commencing one
year from the Effective Date, the Company will instruct the Warrant Agent to
notify the Representative of each Warrant certificate which has been properly
completed and delivered for exercise by holders of Warrants during each such
month. The Company will instruct the Transfer Agent that the Representative
may at any time during business hours upon reasonable advance written notice,
at its expense, examine the records of the Company and the Warrant Agent
which relate to the exercise of the Warrants.
SECTION 17. Notice. Except as otherwise expressly provided in this
Agreement: (a) whenever notice is required by the provisions hereof to be
given to the Company, such notice shall be given in writing, by certified
mail, return receipt requested, addressed to the Company at the address set
forth herein on the first page, copy to Steven Morse, Esq., Lester Morse
P.C., Suite 420, 111 Great Neck Road, Great Neck, NY 11021; and (b) whenever
notice is required by the provisions hereof to be given to the Underwriters,
such notice shall be in writing addressed to the Representative at VTR, at
the address set forth herein on the first page copy to Steven Gold, Esq.,
Mintz & Gold LLP, 444 Park Avenue South, New York, NY 10016. Any party may
change the address for notices to be sent by giving written notice to the
other persons.
SECTION 18. Representations and Agreements to Survive Delivery.
Except as the context otherwise requires, all representations, warranties,
covenants, and agreements contained in this Agreement shall be deemed to be
representations, warranties, covenants, and agreements as at the date hereof
and as at the Closing Date and the Additional Closing Date(s), and all
representations, warranties, covenants, and agreements of the several
Underwriters and the Company, shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any of the
Underwriters or any of their controlling persons, and shall survive any
termination of this Agreement (whensoever made) and/or delivery of the Units
to the several Underwriters.
SECTION 19. Miscellaneous. This Agreement is made solely for the
benefit of the Underwriters and the Company and their respective successors
and assigns, and no other person shall acquire or have any right under or by
virtue of this Agreement. The term "successor" or the term "successors and
assigns" as used in this Agreement shall not include any purchaser, as such,
of any of the Units. This Agreement shall not be assignable by any party
without the other party's prior written consent. This Agreement shall be
binding upon, and shall inure to the benefit of, our respective successors
and permitted assigns. The foregoing represents the sole and entire
agreement between us with respect to the subject matter hereof and supersedes
any prior agreements between us with respect thereto. This Agreement may not
be modified, amended or waived except by a written instrument signed by the
party to be charged. The validity, interpretation and construction
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of this Agreement, and of each part hereof, shall be governed by the internal
laws of the State of New York, without giving effect to the conflict of laws
provisions thereof.
This Agreement may be executed in any number of counterparts, each
of which shall be deemed an original, but all of which together shall be
deemed to be one and the same instrument. If a party signs this Agreement
and transmits an electronic facsimile of the signature page to the other
party, the party who receives the transmission may rely upon the electronic
facsimile as a signed original of this Agreement.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us a counterpart hereof, whereupon this
instrument along with all counterparts will become a binding agreement
between the Company and the Underwriters in accordance with its terms.
Very truly yours,
THE HAVANA GROUP, INC.
By:
---------------------------------
(authorized officer)
CONFIRMED AND ACCEPTED, as of the
date first above written:
VTR CAPITAL, INC.
By:
----------------------------------------------
For itself and as the Representative of the
other Underwriters named in Schedule I hereto.
CONFIRMED AND ACCEPTED, as of the
date first above written with regard to Section 3(a) of this Agreement:
DUNCAN HILL, INC.
By:
----------------------------------------------
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SCHEDULE I
Number of Units to be
Underwriters Purchased
------------ ---------------------
VTR Capital, Inc.
----------
Total 460,000
----------
----------
25
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THE HAVANA GROUP, INC. EXHIBIT 1.1
460,000 Units
Each Unit Consisting of one Share of Common Stock
and two Class A Common Stock Purchase Warrants
AGREEMENT AMONG UNDERWRITERS
, 1998
To each of the Underwriters named in Schedule I
to the attached Underwriting Agreement
Dear Sirs:
1. Underwriting Agreement. The Havana Group, Inc., a Delaware
corporation (the "Company"), proposes to enter into an underwriting agreement
in the form of the Underwriting Agreement attached hereto as Exhibit "A" (the
"Underwriting Agreement") with the underwriters named in Schedule I to the
Underwriting Agreement (the "Underwriters"), acting severally and not
jointly, with respect to the purchase from the Company of 460,000 Units, each
unit consisting of one share of Common Stock and two Class A Common Stock
Purchase Warrant (the "Firm Units"). Upon our request, and as provided in
Section 3 of the Underwriting Agreement, Duncan Hill, Inc., the Company's
principal stockholder, also will sell to the Underwriters up to a maximum of
an additional 69,000 Units (the "Optional Units"). Both the Firm Units and
the Optional Units are sometimes collectively referred to herein as the
"Units." All of the Units which are the subject of this Agreement are more
fully described in the Prospectus of the Company described below. Under the
terms of the Underwriting Agreement, each of the Underwriters will agree, in
accordance with the terms thereof to purchase the aggregate number of Firm
Units set forth opposite its name in said Schedule I, subject to adjustment
pursuant to Section 12 hereof and Section 14 of the Underwriting Agreement.
2. Registration Statement and Prospectus. The Units are described in
a registration statement and related prospectus which have been filed with
the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). An amendment to such
registration statement has been or will be filed in which you have been or
will be named as one of the Underwriters of the Units. Copies of the
registration statement as filed and as amended have been delivered to you,
and you hereby authorize us to approve on your behalf any further amendments
or supplements which may be necessary or appropriate. The registration
statement, as amended at the time it becomes effective, is called the
"Registration Statement" and the final prospectus relating to the Units as
filed by the Company with the Commission pursuant to Rule 424(b) under the
Act is referred to as the "Prospectus."
3. Authority of Representative. You authorize us as your
Representative to execute the Underwriting Agreement with the Company in the
form attached with such insertions, deletions or other changes as we may
approve (but not as to the number of, and price of, the Units to be
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purchased by you except as provided herein and therein) and to take such
action as in our discretion we may deem advisable in respect of all matters
pertaining to the Underwriting Agreement, this Agreement, the transactions
for the accounts of the several Underwriters contemplated thereby and hereby,
and the purchase, carrying, sale and distribution of the Units.
4. Public Offering. In connection with the public offering of the
Units, you authorize us, in our discretion:
(a) To determine the time and manner of the initial public
offering (after the Registration Statement become effective), the initial
public offering price, and the concessions and reallowances to dealers, to
change the public offering price and such concessions and reallowances after
the initial public offering, to furnish the Company with the information to
be included in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) with respect to the terms of the public
offering, and to determine all matters relating to the public advertisement
of the Units and any communications with dealers or others;
(b) To reserve all or any part of your Units for sale to retail
purchasers (including institutions) and to dealers selected by us ("Selected
Dealers") among which may be included any Underwriter (including ourselves)
and each of which shall be a member of the National Association of Securities
Dealers, Inc., and each of which shall agree that in making sales to
purchasers in the United States it will conform to the Rules of Fair Practice
of said Association (or, in the case of a foreign dealer not eligible for
membership in such Association, which shall agree not to reoffer, resell or
deliver Units in the United States, its territories or its possessions, or to
persons whom it has reason to believe are citizens thereof or residents
therein), such reservations for sales to retail purchasers to be as nearly as
practicable in proportion to the respective underwriting obligations of the
Underwriters and such reservations for sales to Selected Dealers to be in
such proportion as we determine, and from time to time to add to the reserved
Units such Units retained by you remaining unsold and to release to you any
of your Units reserved but not sold;
(c) To sell reserved Units as nearly as practicable in proportion
to the respective reservations to retail purchasers at the public offering
price, and to Selected Dealers at the public offering price less the Selected
Dealer's concession pursuant to the Selected Dealer Agreement in
substantially the form attached; and
(d) To buy Units for your account from Selected Dealers at the
public offering price less such amount not in excess of the Selected Dealer's
concession as we may determine.
After advice from us that the Units are released for public offering,
you will offer to the public in conformity with the terms of offering set
forth in the Prospectus, or any amendment or supplement, such of your Units
as we advise you are not reserved.
You recognize the importance of a broad distribution of the Units among
bona fide investors and you agree to use your best efforts to obtain such
broad distribution and to that end, to the extent
2
<PAGE>
you deem practicable, to give priority to small orders. In offering the
Units to Selected Dealers we will take such action as we deem appropriate to
effect a broad distribution.
5. Repurchase of Units Not Effectively Placed for Investment. You are
requested to place for investment those of your Units which are not reserved
as aforesaid. Any Units sold by you (otherwise than through us) which may be
delivered to us against a purchase contract made by us for the account of any
Underwriter prior to termination of the provisions referred to in Section 11
of this Agreement, shall be purchased by you upon demand from us at the cost
of such purchase plus brokerage commissions and transfer taxes on redelivery.
Units delivered on such repurchase need not be identical to those purchased
by you. In lieu of demand repurchase by you we may in our discretion (i)
sell for your account the Units so purchased by us, at such price and upon
such terms as we may determine, and debit or credit your account with the
loss and expense or net profit resulting from such sale, or (ii) charge your
account with an amount not in excess of the Selected Dealer's concession with
respect to such Units plus brokerage commissions and transfer taxes paid in
connection with such purchase.
6. Payment and Delivery. We shall give you at least 24 hours prior
notice of the Closing Date (as defined in the Underwriting Agreement). You
agree to deliver to us at or before 9:00 a.m., New York City time, on such
Closing Date and at or before 9:00 a.m. New York City time, on the Additional
Closing Date referred to in the Underwriting Agreement if the Optional Units
are purchased, at the office of VTR Capital, Inc., 17 Battery Place, New
York, NY 10004 (or such other office as we may direct), a certified check or
bank cashier's check payable in New York Clearing House funds to the order of
VTR Capital, Inc., as Representative, for the full purchase price of the
Units which you shall have agreed to purchase from the Company less the
concession to Selected Dealers. If you are a member or clear through a
member of the Depository Trust Company ("DTC"), you may, in your discretion,
deliver payment and receive Units through the facilities of DTC. The
proceeds shall be delivered in the amounts required in each case for payment
of the full purchase price by us to the Company against delivery of the Units
to us for your account. We are authorized to accept that delivery and to
give a receipt therefor. We may in our discretion make such payment on your
behalf with our own funds, in which event you will reimburse us promptly upon
request. You authorize us, as your custodian, to take delivery of your
Units, registered as we may direct in order to facilitate deliveries. You
also authorize us to hold for your account such of your Units as we have
reserved for sale to retail purchasers and to Selected Dealers, and to
deliver your reserved Units against such sales. We will deliver your
unreserved Units to you promptly and, after we receive payment for reserved
Units sold by us for your account, we will remit to you, as promptly as
practicable, an amount equal to the price paid by you for such Units. As
soon as practicable after termination of Sections 4, 5 and 9 and the first
and penultimate sentences of Section 8 of this Agreement (pursuant to Section
11 hereof) we will deliver to you any of your Units reserved but not sold.
All Units delivered to you pursuant to this Section will be evidenced by
certificates for the Common Stock and Warrants included in the Units in such
denominations as you shall direct by written notice received by us not later
than the second full business day preceding the Closing Date.
7. Authority to Borrow. In connection with the purchase or carrying
of any Units purchased hereunder for your account, you authorize us, in our
discretion, to advance funds for your
3
<PAGE>
account, charging current interest rates, or to arrange loans for your
account, and in connection therewith to execute and deliver any notes or
other instruments and hold or pledge as security any of your Units. Any
lender may rely on our instructions in all matters relating to any such loan.
Any of your Units held by us for your account may be delivered to you for
carrying purposes only, and subject to our further direction.
8. Stabilization and Over-Allotment. To facilitate the distribution
of the Units, you authorize us during the term of this Agreement, or for such
longer period as may be necessary in our discretion, to make purchases and
sales of the Units for your account in the open market or otherwise, for long
or short account, on such terms as we deem advisable and, in arranging sales,
to over-allot. You also authorize us to cover any short position incurred
pursuant to this Section on such terms as we deem advisable. Included in the
authority granted to us by you is the authority to exercise the
over-allotment option to purchase the Optional Units granted by Section 3 of
the Underwriting Agreement. Except with respect to the exercise of such
over-allotment option, all such purchases and sales (other than purchases and
sales of the Optional Units) shall be made for the accounts of the several
Underwriters as nearly as practicable in proportion to their respective
underwriting obligations. Your net commitment under this Section shall not,
at the end of any business day, exceed 15% of your maximum underwriting
obligation. You will on our demand take up at cost or deliver against
payment any Units purchased or sold or over-allotted for your account and, if
any such other Underwriter defaults in its corresponding obligation, you will
assume your proportionate share of such obligation without relieving the
defaulting Underwriter from liability. You will be obligated in respect to
purchases and sales made for your account hereunder whether or not the
proposed purchase of the Units is consummated. Upon request you will advise
us of Units retained by you and unsold and will sell to us for the account of
one or more of the Underwriters such of your unsold Units as we may
designate, at the public offering price thereof less such amount as we may
determine, but not in excess of the Selected Dealer's concession with respect
thereto. Until the termination of this Agreement pursuant to Section 11
hereof, or prior notification by us, we shall have the sole right to effect
stabilizing transactions in the Units. You agree that until such time you
will not make any purchases or sales of any of such Units except as provided
in Section 9 hereof. You also agree to timely provide us with the information
required by Rule 17a-2(d) under the Securities Exchange Act of 1934, as
amended (the "1934 Act").
9. Open Market Transactions. You agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any
Units, except as brokers pursuant to unsolicited orders and as otherwise
provided in this Agreement or in the Underwriting Agreement. You further
agree not to offer the Units for sale until notified by us, as the
Representative of the Underwriters, that they are released for that purpose.
10. Expenses and Settlement. We may charge your account with Selected
Dealer's concessions and all transfer taxes on sales made by us for your
account and with your proportionate share (based upon your underwriting
obligation) of all other expenses incurred by us under the terms of this
Agreement or the Underwriting Agreement, in excess of those reimbursed by the
Company pursuant to Section 8 of the Underwriting Agreement, or in connection
with the purchase, carrying, sale or distribution of the Units. Our
determination of the amount and allocation of expenses shall
4
<PAGE>
be conclusive. As soon as practicable after termination of the provisions
referred to in Section 11, the accounts hereunder will be settled, but we may
reserve from distribution such amount as we deem advisable to cover possible
additional expenses. We may at any time make partial distribution of credit
balances or call for payment of debit balances. Any of your funds in our
hands may be held with our general funds without accountability for interest.
Notwithstanding any settlement, you will pay (i) your proportionate share
(based upon your underwriting obligation) of any liability which may be
incurred by the Underwriters, or any of them, based on the claim that the
Underwriters constitute an association, partnership, unincorporated business
or other separate entity, and of any expenses incurred by us, or by any other
Underwriter with our approval, in contesting any such liability, and (ii) any
transfer taxes which may be assessed and paid after such settlement on
account of any sale or transfer for your account.
11. Termination and Settlement. This Agreement will terminate (a) at
the close of business on the 30th day after the date of the Underwriting
Agreement; or (b) on such earlier or later date, not more than 30 days after
the date specified in (a), as we may determine; or (c) on the date of
termination of the Underwriting Agreement, if the same shall be terminated as
provided by its terms.
Upon termination of this Agreement, all authorizations, rights and
obligations hereunder will cease, except (a) the mutual obligation to settle
accounts hereunder, (b) your obligation to pay any claims referred to in the
last paragraph of this Section, (c) the obligations with respect to indemnity
set forth in Section 15 hereof (all obligations of which will continue until
fully discharged), and (d) your obligation with respect to purchases which
may be made by us from time to time thereafter to cover any short position
with respect to the offering, all of which will continue until fully
discharged, and except our authority with respect to matters to be determined
by us, or by us and the Company, pursuant to the terms of the Underwriting
Agreement, which will survive the termination of this Agreement.
The accounts arising pursuant to this Agreement will be settled and paid
as soon as practicable after termination. The determination by us of the
amounts to be paid to or by you will be final and conclusive.
Notwithstanding any settlement upon the termination of this Agreement,
you will pay your proportionate share of any amount asserted against and
discharged by the Underwriters, or any of them, based upon the claim that the
Underwriters constitute an association, unincorporated business or other
separate entity, or based upon or arising out of a claim that this Agreement
or the Underwriting Agreement is invalid or illegal for any reason, including
any expense incurred in defending against such claim, and will pay any
transfer taxes which may be assessed thereafter on account of any sale or
transfer of Units for our account.
12. Default by Underwriters. Default by one or more Underwriters
hereunder or under the Underwriting Agreement shall not release the other
Underwriters from their obligations or affect the liability of any defaulting
Underwriter to the other Underwriters for damages resulting from such
default. In case of default under the Underwriting Agreement by one or more
Underwriters, we may
5
<PAGE>
arrange for the purchase by others, including non-defaulting Underwriters, of
Units not taken up by such defaulting Underwriter and you will, at our
request, increase pro rata with the other non-defaulting Underwriters the
aggregate principal amount of Units which you are to purchase, or both, by an
amount not exceeding one-ninth of your original underwriting obligations. In
the event any such arrangements are made, the respective Units to be
purchased by non-defaulting Underwriters and by such others shall be taken as
the basis for the underwriting obligations under this Agreement.
In the event of default by one or more Underwriters in respect of their
obligations under this Agreement, each non-defaulting Underwriter shall
assume its proportionate share of the obligations under this Agreement of
each such defaulting Underwriter (other than, to the extent stated in the
first paragraph of this Section, the purchase obligation of such defaulting
Underwriter).
13. Position of Representative. We shall be under no liability to you
for any act or omission except for obligations expressly assumed by us in
this Agreement, but no obligation on our part shall be implied or inferred.
Nothing shall constitute the Underwriters, or any of them, an association,
partnership, unincorporated business or other separate entity and the rights
and liability of ourselves and each of the Underwriters are several and not
joint.
14. Compensation to Representative. As compensation for our services
as Representative, you agree to pay us $. per Unit out of the aggregate
underwriting discount attributable to Units which you agree to purchase from
the Company under the Underwriting Agreement. We are authorized to charge
your account with such an amount.
15. Indemnification. You will indemnify and hold harmless each other
Underwriter and each person, if any, who controls such Underwriter within the
meaning of Section 15 of the Act to the extent and upon the terms by which
each Underwriter agrees to indemnify the Company in the Underwriting
Agreement. Such indemnity agreement shall survive the termination of any of
the provisions of this Agreement.
In the event that at any time any claim shall be asserted against us as
or as a result of our having acted as Representative, or otherwise involving
the Underwriters generally, relating to the Registration Statement or any
preliminary prospectus or the Prospectus, as from time to time amended or
supplemented, the public offering of the Units or any of the transactions
contemplated by this Agreement, you authorize us to make such investigation,
to retain such counsel and to take such other action as we shall deem
necessary or desirable under the circumstances, including settlement of any
claim or claims if such course of action shall be recommended by counsel
retained by us. You agree to pay to us, on request, your proportionate share
(based upon your underwriting obligation) of all expenses incurred by us
(including, but not limited to, the disbursements and fees of counsel so
retained) in investigating and defending against such claim or claims, and
your proportionate share (based upon your underwriting obligation) of any
liability incurred by us in respect of such claim or claims, whether such
liability shall be the result of a judgment against us or as a result of any
such settlement.
6
<PAGE>
16. Blue Sky Matters. We shall not have any responsibility with
respect to the right of any Underwriter or other person to sell Units in any
jurisdiction, notwithstanding any information we may furnish in that
connection. You hereby authorize us to take such action as may be necessary
or advisable to qualify the Units for offering and sale in any jurisdiction.
We have caused to be filed Further State Notices respecting the Units to be
offered to the public in New York in the form required by, and pursuant to,
the provisions of Article 23A of the General Business Law of the State of New
York.
17. Title to Units. The Units purchased for the respective accounts of
the several Underwriters shall remain the property of those Underwriters
until sold; and no title to such Units shall in any event pass to us, as
Representative, by virtue of any of the provisions of this Agreement.
18. Capital Requirements. Unless the provisions of clause (b) of the
second sentence of the last paragraph of this Agreement are applicable to
you, you confirm that your commitment hereunder will not result in any
violation of Section 8(b) or 15(c) of the 1934 Act or in any violation of any
of the rules and regulations promulgated under the 1934 Act, including,
without limitation, Rule 15c3-1, or any provision of any applicable rules of
any securities exchange to which you are subject or of any restriction
imposed upon you by such exchange.
19. Notices and Governing Laws. Any notice from you to us shall be
mailed or transmitted by any standard form of written telecommunication to us
at 17 Battery Place, New York, NY 10004. Any notice from us to you shall be
mailed or transmitted by any standard from of written telecommunication to
you at your address as set forth in your Underwriter's Questionnaire. This
Agreement shall be governed by and construed in accordance with the laws of
the State of New York (without regard to conflicts of laws principles).
We represent that we are a member in good standing of the National
Association of Securities Dealers, Inc. You represent that you are (a) a
member in good standing of such Association or (b) a foreign dealer which is
not eligible for membership in such Association, in which event you will make
sales of any Units only outside the United States and its territories and
possessions to persons who are not citizens or residents of the United States
or its territories or possessions, and that in making any such sales, you
will comply with such Association's Interpretation with respect to
Free-Riding and Withholding. You further represent that: (i) you will
notify each of your customers with respect to whose account you have
investment discretion and to whose account you intend to sell any Units that
you propose to sell Units to such account as a principal and you will obtain
the customer's written consent to such sale; and (ii) you will comply with
the requirements of Rule 15c2-8 under the 1934 Act and have distributed or
are distributing copies of a Preliminary Prospectus to all persons to whom
you then expected to mail confirmations of sale, not less than 48 hours prior
to the time it is expected to mail such confirmations.
Very truly yours,
VTR CAPITAL, INC.
7
<PAGE>
By:
----------------------------------
As Representative of the several
Underwriters
Confirmed and accepted as of
the date first above written.
- --------------------------------
Attorney-in-fact for the several
Underwriters named in Schedule I
to the Underwriting Agreement
8
<PAGE>
EXHIBIT 1.2
VTR Capital, Inc.
17 Battery Place
New York, NY 10004
THE HAVANA GROUP, INC.
460,000 Units
SELECTED DEALER AGREEMENT
, 1998
Dear Sirs:
We, as the Underwriter named in the below referred to Prospectus (the
"Underwriter") have agreed, subject to the terms and conditions of the
Underwriting Agreement dated this date (the "Underwriting Agreement") to
purchase from The Havana Group, Inc. (the "Company") at the price set forth
on the cover of such Prospectus, the above referred to 460,000 Units, each
consisting of one (1) share of Common Stock, $.001 par value per share
("Common Stock") and two (2) Class A Redeemable Common Stock Purchase
Warrants ("Warrants"), and up to an additional 69,000 Units, offered
pursuant to an over-allotment option (collectively being called the "Units").
Each Warrant is exercisable to purchase (1) share of Common Stock. The
Units and certain of the terms on which they are being purchased and offered
are more fully described in the enclosed Prospectus (the "Prospectus").
Additional copies of the Prospectus will be supplied to you, in reasonable
quantities upon request.
We, as the Underwriter, are offering to certain dealers ("Selected
Dealers"), among whom we are pleased to include you, part of the Units, at
the public offering price less a concession of $.__ per Unit. The offering
to Selected Dealers is made subject to the issuance and delivery of the Units
to us and their acceptance by us, to the approval of legal matters by our
counsel, and to the terms and conditions hereof, and may be made by us on the
basis of the reservation of Units or an allotment against subscription, or
otherwise in our discretion.
The initial public offering price of the Units is set forth in the
Prospectus. With our consent, Selected Dealers may allow a discount of not
in excess of $.__ per Unit in selling the Units to other dealers meeting the
requirements of the specifications set forth in the affirmation of dealers
contained in the attached Acceptance and Order. Upon our request, you will
notify us of the identity of any dealer to whom you allow such a discount and
any Selected Dealer from whom you receive such a discount.
All orders will be strictly subject to confirmation and we reserve the
right in our uncontrolled discretion to reject any order in whole or in part,
to accept or reject orders in the order of their receipt or otherwise, and to
allot. You are not authorized to give any information or make any
representation other than as set forth in the Prospectus in connection with
the sale of any of the Units.
1
<PAGE>
No dealer is authorized to act as agent for the Underwriter, or for the
Company or the Selling Security Holders, when offering any of the Units.
Nothing contained herein shall constitute the Selected Dealers partners with
us or with one another.
Upon release by us, you may offer the Units at the public offering
price, subject to the terms and conditions hereof. We may, and the Selected
Dealers may, with our consent, purchase Units from and sell Units to each
other at the public offering price less a concession not in excess of the
concession to Selected Dealers.
Payment for Units purchased by you is to be made at our office (or at
such other place as instructed) at the public offering price, on such date as
we may advise, on one day's notice to you, by certified or official bank
check in New York Clearing House funds payable to our order. Delivery to you
of certificates for the Common Stock and Warrants included in the Units will
be made as soon as is practicable thereafter. Unless specifically authorized
by us, payment by you may not be deferred until delivery of certificates to
you. The concession payable to you will be paid as soon as practicable after
the closing.
This Agreement shall terminate at the close of business on the 45th day
after the effective date of the Registration Statement. We may terminate
this Agreement at any time prior thereto by notice to you. Notwithstanding
the termination of this Agreement, you shall remain liable for your
proportionate share of any transfer tax or any liability which may be
asserted or assessed against us or Selected Dealers based upon the claim that
the Underwriter and the Selected Dealers, or any of them, constitute a
partnership, association, unincorporated business or other entity, including
in each case your proportionate share of expenses incurred in defending
against any such claim or liability.
In the event that, prior to the termination of this Agreement, we
purchase in the open market or otherwise any Units delivered to you, you
agree to repay to us for the account of the Underwriter the amount of the
above concession to Selected Dealers plus brokerage commissions and any
transfer taxes paid in connection with such purchase; which amounts can be
withheld from the concession otherwise payable to you hereunder. Certificates
for the Common Stock and Warrants included in the Units delivered on any such
purchase need not be the identical certificates originally issued to you.
At any time prior to the termination of this Agreement, you will, upon
our request, report to us the number of Units purchased by you under this
Agreement which then remain unsold and will, upon our request, sell to us for
the account of the Underwriter the number of such unsold Units that we may
designate, at the public offering price less an amount to be determined by us
not in excess of the concession allowed you.
We shall have full authority to take such action as we may deem
advisable in respect of all matters pertaining to the offering, including,
without limitation, stabilization and over-allotment. We shall be under no
liability to you except for our lack of good faith and for obligations
assumed by us in this Agreement, except that you do not waive any rights that
you may have under the Securities Act of 1933, as amended (the "1933 Act"),
or the rules and regulations thereunder.
Upon application to us, we will inform you of the states and other
jurisdictions of the United States in which it is believed that the Units are
qualified for sale under, or are exempt from the
2
<PAGE>
requirements of, their respective securities laws, but we assume no
responsibility with respect to your right to sell Units in any jurisdiction.
We have filed a Further State Notice with respect to the Units with the
Department of State of the State of New York.
You confirm that you are familiar with Rule 15c2-8 under the Securities
Exchange Act of 1934 (the "1934 Act"), relating to the distribution of
preliminary and final prospectuses, and confirm that you have complied and
will comply therewith (whether or not the Company is subject to the reporting
requirements of Section 13 or 15(d) of the 1934 Act). We will make available
to you, to the extent made available to us by the Company such number of
copies of the Prospectus as you may reasonably request for purposes
contemplated by the 1933 Act, the 1934 Act, and the rules and regulations
thereunder.
Your attention is directed to Regulation M under the 1934 Act, which
contains certain prohibitions against trading by a person interested in a
distribution until such person has completed its participation in the
distribution. You confirm that you will at all times comply with the
provisions of such Regulation in connection with this offering.
Any notice from us shall be deemed to have been duly given if
telephoned, and subsequently mailed or transmitted by any standard form of
written tele-communication to you at the address to which this Agreement is
mailed, or if so mailed or transmitted in the first instance.
Please advise us promptly by telephone or any standard form of written
tele-communication of the principal amount of Units ordered by you and
confirm your agreement hereto by signing the Acceptance and Order on the
enclosed duplicate hereof and returning promptly such signed duplicate copy
to VTR Capital, Inc.,17 Battery Place, New York, NY 10004. Upon receipt
thereof, this instrument and such signed duplicate copy will evidence the
agreement between us.
Very truly yours,
VTR CAPITAL, INC.
By:
---------------------------
3
<PAGE>
ACCEPTANCE AND ORDER
VTR Capital, Inc.
17 Battery Place
New York, NY 10004
Dear Sirs:
We hereby enter our order for ______ Units of The Havana Group, Inc.
under the terms and conditions of the foregoing Agreement.
We agree to all the terms and conditions stated in the foregoing
Agreement. We acknowledge receipt of the Prospectus relating to the above
Units and we further state that in entering this order we have relied upon
said Prospectus and no other statements whatsoever, written or oral. We
affirm that we are either (i) a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") or (ii) a dealer with
its principal place of business located outside the United States, its
territories, or possessions and not registered under the Securities Exchange
Act of 1934 and not eligible for membership in the NASD, who hereby agrees to
make no sales within the United States, its territories or its possessions or
to persons who are nationals thereof or residents therein, and in making any
sales, to comply with the NASD's interpretation with respect to free-riding
and withholding, as well as all other pertinent interpretations of the NASD
that may be applicable to us. We also affirm and agree that we will promptly
re-offer any Units purchased by us in conformity with the terms of the
offering and in conformity with the NASD Conduct Rules of the NASD,
(including, without limitation, Rules 2730, 2740, 2420 and 2750) and all
applicable Rules and Regulations promulgated under the Securities Exchange
Act of 1934.
Date: , 1998 ------------------------------
(Name of Selected Dealer)
By:
----------------------------
(Authorized Signature)
Address:
-----------------------
-----------------------
4
<PAGE>
THE HAVANA GROUP, INC. EXHIBIT 1.3
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
, 1998
VTR Capital, Inc.
17 Battery Place
New York, NY 10004
Gentlemen:
The following sets forth our understanding with respect to your providing
financial advisory services for this corporation.
l. For a period of two (2) years commencing on the date hereof, you will
render financial consulting services to this corporation as such services shall
be required but in no event shall such services require more than two business
days per month. Your services shall include the following:
(a) to advise and assist in matters pertaining to the financial
requirements of our corporation and to assist, as and when required, in
formulating plans and methods of financing;
(b) to prepare and present financial reports required by us and to
analyze proposals relating to obtaining funds for our business, mergers and/or
acquisitions;
(c) to assist in our general relationship with the financial
community including brokers, stockholders, financial analysts, investment
bankers, and institutions; and
(d) to assist in obtaining financial management, and technical and
advisory services, and financial and corporate public relations, as may be
requested or advisable.
2. All services required to be performed hereunder shall be requested by
us in writing and, upon not less than seven business days notice, unless such
notice is waived by you. Such notice shall be to the address specified above or
to such other place as you shall designate to us in writing.
3. For the services to be performed hereunder, and for your continued
availability to perform such services, we will pay you a fee of $50,000 per year
or a total of $100,000, which sum is payable in full in advance on the closing
date of our proposed initial public offering. Further, we will reimburse you
for such reasonable out-of-pocket expenses as may be incurred by you on our
behalf, but only to the extent authorized by us.
<PAGE>
VTR Capital, Inc.
Page 2
4. This Agreement has been duly approved by our Board of Directors.
5. You shall have no authority to bind this corporation to any contract
or commitment, inasmuch as your services hereunder are advisory in nature.
6. You will maintain in confidence all proprietary, non-published
information obtained by you with respect to our corporation during the course of
the performance of your services hereunder and you shall not use any of the same
for your own benefit or disclose any of the same to any third party, without our
prior written consent, both during and after the term of this Agreement.
7. This Agreement shall not be assignable by either of us without the
other party's prior written consent.
8. This Agreement shall be binding upon, and shall inure to the benefit
of, our respective successors and permitted assigns.
9. The foregoing represents the sole and entire agreement between us with
respect to the subject matter hereof and supersedes any prior agreements between
us with respect thereto. This Agreement may not be modified, amended or waived
except by a written instrument signed by the party to be charged. This
Agreement shall be governed by and construed in accordance with the internal
laws of the State of New York, without regard to the principles of conflicts of
laws of such State.
Please signify your agreement to the foregoing by signing and returning to
us the enclosed copy of this Agreement which will thereupon constitute an
agreement between us.
Very truly yours,
THE HAVANA GROUP, INC.
BY ____________________________________________
William L. Miller, Chief Executive Officer
Agreed and Consented to:
VTR CAPITAL, INC.
BY ________________________________
<PAGE>
EXHIBIT 4.0
THE HAVANA GROUP, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THGI
CUSIP 419209 10 1
SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFIES that
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
THE HAVANA GROUP, INC. transferable on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
(Company Seal)
/s/ Illegible /s/ Illegible
Secretary President
Countersigned and Registered:
HARRIS TRUST COMPANY OF NEW YORK
Transfer Agent
and Registrar
By
Authorized Officer
<PAGE>
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF TRANS MIN ACT-- Custodian Under
-------------------- --------------------
(Cust) (Minor)
the Transfers to Minors Act
----------------
(State)
Additional abbreviations may also be used though not in the above list.
For value received, hereby sell, assign and transfer unto
----------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------
- ------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
common shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint
- -------------------------------------------------------------------- Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
-------------------
-----------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature Guaranteed:
--------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
VOID AFTER , 2003
No. THGU CLASS A WARRANTS
REDEEMABLE CLASS A WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
CUSIP 419209 11 9
THE HAVANA GROUP, INC.
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns
(the "Registered Holder") is the owner of the number of Warrants (the
Warrants") specified above. Each Warrant initially entitles the Registered
Holder to purchase, subject to the terms and conditions set forth in this
Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and non-assessable share of Common Stock, $.001 par value, of The Havana
Group, Inc., a Delaware corporation (the "Company"), at any time from ,
1998, and prior to the Expiration Date (as hereinafter defined), upon the
presentation and surrender of this Warrant Certificate with the Subscription
Form on the reverse hereof duly executed, at the corporate office of Harris
Trust Company of New York, 430 Park Avenue, New York, NY 10023, as Warrant
Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$5.25, subject to adjustment (the "Purchase Price"), in lawful money of the
United States of America in cash or by check made payable to the Warrant
Agent for the account of the Company.
This Warrant Certificate and each Warrant represented hereby are issued
pursuant to and are subject in all respects to the terms and conditions set
forth in the Warrant Agreement (the "Warrant Agreement"), dated
, 1998, by and between the Company and the Warrant Agent.
The Purchase Price and the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment upon the occurrence of certain events as provided
for in the Warrant Agreement.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the warrants represented hereby, the Company
shall cancel this Warrant Certificate upon the surrender hereof and shall
execute and deliver a new Warrant Certificate or Warrant Certificates of like
tenor, which the Warrant Agent shall countersign, for the balance of such
Warrants.
The term Expiration Date shall mean 5:00 P.M., (New York City Time) on
, 2003. If such date shall in the State of New York be a Saturday,
Sunday, holiday or a day on which the banks are authorized to close, then the
Expiration Date shall mean 5:00 P.M. (New York City Time) the next following
day which in the State of New York is not a Saturday, Sunday, holiday or a
day on which banks are authorized to close.
The Company shall not be obligated to deliver any securities pursuant to
the exercise of this Warrant unless a registered statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such
securities is effective or an exemption thereunder is available. The Company
has covenanted and agreed that, if required by the Act, it will file a
registered statement under the Act, use its best efforts to cause the same to
become effective, to keep such registration statement current, if required
under the Act, while any of the Warrants are outstanding, and deliver a
prospectus which complies with Section 10(a)(3) of the Act to the Registered
Holder exercising this Warrant. This Warrant shall not be exercisable by a
Registered Holder in any state where such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by the
Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an
equal aggregate number of Warrants, each of such new Warrant Certificates to
represent such number of Warrants as shall be designated by such Registered
Holder at the time of such surrender. Upon due presentment and payment of any
tax or other charge imposed in connection therewith or incident thereto, for
registration of transfer of this Warrant Certificate at such office, a new
Warrant Certificate or Warrant Certificates representing an equal aggregate
number of Warrants will be issued to the transferee in exchange therefor,
subject to the limitations provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the Registered
Holder shall not be entitled to any rights of a stockholder of the Company,
including, without limitation, the right to vote or to receive dividends or
other distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may be
redeemed at the option of the Company at a redemption price of $.10 per
Warrant, at any time commencing after , 1999, provided that the Market
Price (as defined in the Warrant Agreement) of the Common Stock for twenty
(20) consecutive trading days and ending no more than fifteen (15) days prior
the Notice of Redemption, as defined below, shall have averaged at least
$10.50 per share, subject in each case to adjustment in the event of any
stock splits or similar events. Notice of redemption (the Notice of
Redemption ) shall be given at least thirty days before the date fixed for
redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect
to this Warrant except to receive the $.10 per Warrant upon surrender of this
Certificate.
Under certain circumstances, VTR Capital, Inc., its successors and assigns
shall be entitled to receive, in connection with the exercise of the Warrants
represented hereby, five percent (5%) of the Purchase Price of the Warrants
so exercised commencing on or after , 1999.
Prior to due presentment for registration of transfer hereof, the Company
and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the Company or the Warrant Agent) for all purposes and
shall not be affected by any notice to the contrary, except as provided in
the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in accordance
with the laws of the State of New York without giving effect to conflicts of
law principles.
This Warrant Certificate is not valid unless countersigned by the Warrant
Agent.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be
duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: , 1998 THE HAVANA GROUP, INC.
BY: /s/ Illegible BY: /s/ Illegible
Countersigned:
HARRIS TRUST COMPANY OF NEW YORK
as Warrant Agent
SECRETARY PRESIDENT
By:
Authorized Officer
(Company Seal)
<PAGE>
SUBSCRIPTION FORM
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the
securities issuable upon the exercise of such Warrants, and requests that
certificates for such Securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
(please print or type name and address)
and be delivered to
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, that a new Warrant Certificate for the balance of
such Warants be registered in the name of, and delivered to, the Registered
Holder at the address stated below.
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by VTR Capital, Inc. / /
2. The exercise of this Warrant was solicited by__________________ / /
3. If the exercise of this Warrant was not solicited, please check
the following box. / /
Dated:___________________________________ X__________________________________
__________________________________
__________________________________
Address
__________________________________
Social Security or Taxpayer
Identification Number
__________________________________
Signature Guaranteed
ASSIGNMENT
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, _______________________________, hereby sells, assigns
and transfers unto
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
(please print or type name and address)
_______________________________________of the Warrants represented by this
Warrant Certificate, and hereby irrevocably constitutes and appoints
________________________________________attorney to transfer this Warrant
Certificate on the books of the Company, with full power of substitution in
the premises.
Dated:__________________________________ X__________________________________
Signature Guaranteed
____________________________________
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO
THE NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND
MUST BE GUARANTEED BY A MEMBER OF THE MEDALLION SIGNATURE PROGRAM.
<PAGE>
The Havana Group, Inc.
THGU UNITS
SEE REVERSE FOR
CERTAIN DEFINITIONS CUSIP 419209 20 8
UNITS CONSISTING ON ONE COMMON SHARE AND TWO
REDEEMABLE CLASS A WARRANTS EACH TO PURCHASE ONE COMMON SHARE
This Certifies that
is the owner of Units
Each Unit ("Unit") consists of one share of Common Stock of The Havana Group,
Inc., a Delaware corporation (the "Company") and two Redeemable Class A Common
Stock Purchase Warrants (the "Class A Warrants"). The Common Stock and the Class
A Warrants are not detachable or separately transferable until the earlier of
(i) , 1998 or (ii) the date selected by VTR Capital, Inc., the
Representative of the Company's initial public offering, in writing for
separation (the "Separation Date"). After the Separation Date, the Common Stock
and Class A Warrants will be detachable and may trade separately. Each Class A
Warrant entitles the holder to purchase one share of Common Stock at a price of
$5.25 and is exercisable from the Separation Date until , 2003 (the
"Expiration Date"). The Company may redeem the Class A Warrants at a price of
$.10 per Warrant, at any time after , 1999, upon not less than 30 days
prior written notice, if the closing bid price of the Common Stock has been at
least $10.50 per share for 20 consecutive trading days ending within 15 days
prior to the date on which the notice of redemption is given.
After the Separation Date, Unit Holder must submit their Unit certificates to
the Transfer Agent and Registrar of the Company (which firm is also the Warrant
Agent as defined below) to be exchanged for Common Stock and Warrant
certificates. The terms, rights and privileges of the Warrants are set forth in
the Warrant Agreement (the "Warrant Agreement") dated , 1998 by and
between the Company and Harris Trust Company of New York (the "Warrant Agent").
A copy of the Warrant Agreement is on file at the office of the Warrant Agent at
430 Park Avenue, New York, NY 10022, and are available to any Unit Holder or
Warrant Holder on written request and without cost. The Warrants shall be void
unless exercised before 5:00 p.m. New York City Time on the Expiration Date.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar of the Company.
DATED
(Secretary Signature) (President Signature)
(Company Seal)
SECRETARY PRESIDENT
Countersigned and Registered:
HARRIS TRUST COMPANY OF NEW YORK
Transfer Agent and Registrar
By
Authorized Signature
<PAGE>
THE HAVANA GROUP, INC.
The Corporation will furnish without charge to each stockholder who so requests,
a statement of the powers, designations, preferences and relative,
participating, optional, or other special rights of each class of shares or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT-- ________ Custodian___________
(Cust) (Minor)
under Uniform Gifts to Minors
Act _____________________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------
- -------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------- Units
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
- -------------------------------------------------------------------- Attorney
to transfer the said Units on the books of the within named Corporation with
full power of substitution in the premises.
Dated
------------------
NOTICE:
--------------------------------------------
THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
SIGNATURE(S) GUARANTEED:
--------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.3
No sale, offer to sell or transfer of the securities represented by this
certificate or any interest therein shall be made unless a registration
statement under the Securities Act of 1933, as amended (the "Act"), with
respect to such transaction is then in effect, or the issuer has received an
opinion of counsel satisfactory to it that such transfer does not require
registration under that Act.
This Warrant will be void after 5:00 p.m. New York time on ___________,
2003 (i.e. five years from the effective date of the Registration Statement).
Warrant No._________
UNDERWRITERS' UNIT WARRANT
To Subscribe for and Purchase Units of
THE HAVANA GROUP, INC.
(Transferability Restricted as Provided in Paragraph 2 Below)
THIS CERTIFIES THAT, for value received, _______________________________
__________________ or registered assigns, is entitled to subscribe for and
purchase from The Havana Group, Inc., incorporated under the laws of the
State of Delaware (the "Company"), up to ________ fully paid and
non-assessable Units consisting of one fully paid and non-assessable share of
Common Stock of the Company and two Class A Common Stock Purchase Warrants
(the "Underwriters' Class A Warrants") of the Company, as hereinafter
defined, at the "Purchase Price" and during the period hereinafter set forth,
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth. This Warrant (the "Warrant" or the "Underwriters' Unit
Warrant") is one of an issue of the Company's Underwriters' Unit Warrants
identical in all respects except as to the names of the holders thereof and
the number of Units purchasable thereunder, representing on the original
issue thereof rights to purchase up to 46,000 Units.
1. As used herein:
(a) "Common Stock" or "Common Shares" shall initially refer to the
Company's common stock, $.001 par value as more fully set forth in Section 5
hereof.
(b) "Warrant Agreement" shall refer to the Warrant Agreement
dated as of ___________, 199_, as amended ______, 1998 between Harris Trust
Company of New York and the Company.
(c) "Class A Warrants" shall refer to the Warrant(s) included in
the Units offered to the public by the Company through VTR CAPITAL, INC.,
pursuant to a Registration Statement
<PAGE>
declared effective by the Securities and Exchange Commission ("SEC") on
__________, 1998 and issued or to be issued subject to terms and conditions
of the Warrant Agreement.
(d) "Underwriters' Class A Warrants" shall refer to the Class A
Warrants issuable upon exercise of this Warrant to the holder thereof and
shall be identical in all respects to the Class A Warrants issued in the
public offering except that the exercise price shall be equal to 150% of the
public exercise price of the Class A Warrants.
(e) "Units" shall consist of one share of Common Stock and two
Class A Warrants. The Common Stock included in the Units and issuable upon
the exercise of the Underwriters' Class A Warrants are subject to adjustment
pursuant to Section 4 hereof and the Warrant Agreement.
(f) "Effective Date" shall mean the date that the Securities and
Exchange Commission declares effective form SB-2, File No. 333-45863.
(g) "Holders" shall mean the registered holder of the
Underwriters' Warrants or any issued Underlying Securities.
(h) "Purchase Price" shall be $9.00 per Unit which is subject to
adjustment pursuant to Section 4 hereof.
(i) "Underwriter" shall refer to VTR CAPITAL, INC.
(j) "Underwriting Agreement" shall refer to the Underwriting
Agreement dated ___________, 1998 between the Company and the Underwriter.
(k) "Underwriters' Unit Warrants" shall refer to Warrants to
purchase an aggregate of up to 46,000 Units issued to the Underwriter or its
designees by the Company pursuant to the Underwriting Agreement (including
the Warrants represented by this Certificate), as such may be adjusted from
time to time pursuant to the terms of Section 4 hereof (and including any
Warrants represented by any certificate issued from time to time in
connection with the transfer, partial exercise, exchange of any Warrants or
in connection with a lost, stolen, mutilated or destroyed Warrant
certificate, if any, or to reflect an adjusted number of Units).
(l) "Underlying Securities" shall refer to and include the Common
Shares and Underwriters' Class A Warrants issuable or issued upon exercise of
the Underwriters' Unit Warrants as well as any Common Shares issued upon the
exercise of the Underwriters' Class A Warrants.
2. The purchase rights represented by this Warrant may be exercised by
the holder hereof, in whole or in part at any time, and from time to time,
for a period commencing one year from the Effective Date and expiring on
___________, 2003 (the "Expiration Date"), by the surrender of this Warrant,
with the purchase form attached duly executed, at the Company's office (or
such office or agency of the Company as it may designate in writing to the
Holder hereof by notice pursuant to Section 14 hereof), and upon payment by
the Holder to the Company in cash, or by certified check or bank draft of the
Purchase Price for such Units. The Company agrees that the Holder hereof
shall
2
<PAGE>
be deemed the record owner of such Underlying Securities as of the close of
business on the date on which this Warrant shall have been presented and
payment made for such Units as aforesaid. Certificates for the Underlying
Securities so purchased shall be delivered to the Holder hereof within a
reasonable time, not exceeding five (5) days, after the rights represented by
this Warrant shall have been so exercised. If this Warrant shall be exercised
in part only, the Company shall, upon surrender of this Warrant for
cancellation, deliver a new Underwriters' Warrant evidencing the rights of
the Holder hereof to purchase the balance of the Units which such Holder is
entitled to purchase hereunder. Exercise in full of the rights represented by
this Warrant shall not extinguish the rights granted under Section 9 hereof.
In the event that the Underwriters' Class A Warrants have expired,
this Warrant will entitle the holder to purchase only the shares of Common
Stock included in the Units, subject to adjustment as provided for herein.
3. Subject to the provisions of Section 8 hereof, (i) this Warrant is
exchangeable at the option of the Holder at the aforesaid office of the
Company for other Underwriters' Warrants of different denominations entitling
the Holder thereof to purchase in the aggregate the same number of Units as
are purchasable hereunder; and (ii) this Warrant may be divided or combined
with other Underwriters' Warrants which carry the same rights, in either
case, upon presentation hereof at the aforesaid office of the Company
together with a written notice, signed by the Holder hereof, specifying the
names and denominations in which new Underwriters' Warrants are to be issued,
and the payment of any transfer tax due in connection therewith.
4. The Underwriters' Class A Warrants included in the Units will be
subject to adjustment from time to time as set forth in the Warrant Agreement
to the same extent as the Class A Warrants which have been sold to the
public. Subject and pursuant to the provisions of this Section 4, the
Purchase Price and number of Common Shares included in the Units subject to
this Warrant shall be subject to adjustment from time to time as set forth
hereinafter.
(a) If the Company shall, at any time, subdivide its outstanding
Common Shares by recapitalization, reclassification, split up thereof, or
other such issuance without additional consideration, the appropriate
Purchase Price immediately prior to such subdivision shall be proportionately
decreased, and if the Company shall at any time combine the outstanding
Common Shares by recapitalization, reclassification or combination thereof,
the Purchase Price immediately prior to such combination shall be
proportionately increased. Any such adjustment to the Purchase Price or the
corresponding adjustment to the Purchase Price shall become effective at the
close of business on the record date for such subdivision or combination. No
adjustment to the Purchase Price and the number of Common Shares issuable
upon exercise of this Warrant shall be required if such adjustment provides
the holders of this Warrant with disproportionate rights, privileges and
economic benefits which are not provided to the public shareholders.
(b) In the event that prior to the Expiration Date the Company
adopts a resolution to merge, consolidate, or sell percentages in all of its
assets, each Warrant holder upon the exercise of his Underwriters' Warrant
will be entitled to receive the same treatment as a holder of any other share
of Common Stock. In the event the Company adopts a resolution for the
liquidation, dissolution, or winding up of the Company's business, the
Company will give written notice of such
3
<PAGE>
adoption of a resolution to the registered holders of the Underwriters'
Warrants. Thereupon all liquidation and dissolution rights under this
Warrant will terminate at the end of thirty (30) days from the date of the
notice to the extent not exercised within those thirty (30) days.
(c) If any capital reorganization or reclassification of the
capital stock of the Company or consolidation or merger of the Company with
another corporation, shall be effected in such a way that holders of Common
Stock shall be entitled to receive stock, securities, cash or assets with
respect to or in exchange for Common Stock, then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, the Company
or such successor or purchasing corporation, as the case may be, shall
execute with the Warrant Agent a supplemental Warrant Agreement providing
that each registered holder of an Underwriters' Unit Warrant shall have the
right thereafter and until the Expiration Date to exercise such Warrant for
the kind and amount of stock, securities, cash or assets receivable upon such
reorganization, reclassification, consolidation, merger or sale by a holder
of the number of shares of Common Stock for the purchase of which such
Warrant might have been exercised immediately prior to such reorganization,
reclassification, consolidation, merger or sale, subject to adjustments which
shall be as nearly equivalent as may be practicable to the adjustments
provided for in this Section 4.
(d) In case at any time the Company shall declare a dividend or
make any other distribution upon any stock of the Company payable in Common
Stock, then such Common Stock issuable in payment of such dividend or
distribution shall be deemed to have been issued or sold without
consideration.
(e) Upon any adjustment of the appropriate respective Purchase
Price as hereinabove provided, the number of Common Shares issuable upon
exercise of each class of Warrant shall be changed to the number of shares
determined by dividing (i) the aggregate Purchase Price payable for the
purchase of all shares issuable upon exercise of that class of Warrant
immediately prior to such adjustment by (ii) the appropriate Purchase Price
per share in effect immediately after such adjustment. For the purposes of
the foregoing, no value shall be given to the Underwriters' Class A Warrants.
(f) No adjustment in the Purchase Price shall be required under
Section 4 hereof unless such adjustment would require an increase or decrease
in such price of at least 1% provided, however, that any adjustments which by
reason of the foregoing are not required at the time to be made shall be
carried forward and taken into account and included in determining the amount
of any subsequent adjustment, and provided further, however, that in case the
Company shall at any time subdivide or combine the outstanding Common Shares
as a dividend, said amount of 1% per share shall forthwith be proportionately
increased in the case of a combination or decreased in the case of a
subdivision or stock dividend so as to appropriately reflect the same.
(g) On the effective date of any new Purchase Price the number of
shares as to which this Warrant may be exercised shall be increased or
decreased so that the total sum payable to the Company on the exercise of
this Warrant shall remain constant.
(h) The form of Underwriters' Unit Warrant need not be changed
because of any change pursuant to this Article, and Underwriters' Unit
Warrants issued after such change may state
4
<PAGE>
the Purchase Price and the same number of shares as is stated in the
Underwriters' Unit Warrants initially issued pursuant to this Warrant.
However, the Company may at any time in its sole discretion (which shall be
conclusive) make any change in the form of Underwriters' Unit Warrant that
the Company may deem appropriate and that does not affect the substance
thereof, and any Underwriters' Unit Warrant thereafter issued or
countersigned, whether in exchange or substitution for an outstanding Warrant
or otherwise, may be in the form as so changed.
5. For the purposes of this Warrant, the terms "Common Shares" or
"Common Stock" shall mean (i) the class of stock designated as the common
stock of the Company on the date set forth on the first page hereof or (ii)
any other class of stock resulting from successive changes or
re-classifications of such Common Stock consisting solely of changes in par
value, or from no par value to par value, or from par value to no par value.
If at any time, as a result of an adjustment made pursuant to Section 4, the
securities or other property obtainable upon exercise of this Warrant shall
include shares or other securities of the Company other than Common Shares or
securities of another corporation or other property, thereafter, the number
of such other shares or other securities or property so obtainable shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Shares
contained in Section 4 and all other provisions of this Warrant with respect
to Common Shares shall apply on like terms to any such other shares or other
securities or property. Subject to the foregoing, and unless the context
requires otherwise, all references herein to Common Shares shall, in the
event of an adjustment pursuant to Section 4, be deemed to refer also to any
other securities or property then obtainable as a result of such adjustments.
6. The Company covenants and agrees that:
(a) During the period within which the rights represented by this
Warrant may be exercised, the Company shall, at all times, reserve and keep
available out of its authorized capital stock, solely for the purposes of
issuance upon exercise of this Warrant, such number of its Common Shares as
shall be issuable upon the exercise of this Warrant and the exercise of the
Underwriters' Class A Warrants and at its expense will obtain the listing
thereof on all national securities exchanges on which the Class A Warrants
are then listed; and if at any time the number of authorized Common Shares
shall not be sufficient to effect the exercise of this Warrant and the
exercise of the Underwriters' Class A Warrants included therein, the Company
will take such corporate action as may be necessary to increase its
authorized but unissued Common Shares to such number of shares as shall be
sufficient for such purpose; the Company shall have analogous obligations
with respect to any other securities or property issuable upon exercise of
this Warrant.
(b) All Common Shares which may be issued upon exercise of the
rights represented by this Warrant or upon the exercise of the Underwriters'
Class A Warrants will, upon issuance and payments be validly issued, fully
paid, nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof (except as may be concurrently discharged by the
Company or the Holder); and,
(c) All original issue taxes payable in respect of the issuance of
Common Shares upon the exercise of the rights represented by this Warrant or
the Underwriters' Class A Warrants
5
<PAGE>
shall be borne by the Company but in no event shall the Company be
responsible or liable for income taxes or transfer taxes upon the transfer of
any Underwriters' Warrants.
7. Until exercised, this Warrant shall not entitle the Holder hereof
to any voting rights or other rights as a shareholder of the Company, except
that the Holder of this Warrant shall be deemed to be a shareholder of this
Company for the purpose of bringing suit on the ground that the issuance of
shares of Common Stock by the Company is improper under the laws of the
Company's state of incorporation.
8. This Warrant shall not be sold, transferred, assigned or
hypothecated for a period of twelve (12) months from the Effective Date of
the Company's Registration Statement with respect to which this Warrant has
been issued, except to officers of the Underwriter, and/or the other
underwriters and/or selected dealers who participated in such offering, or
the officers or partners of such underwriters and/or selected dealers. In no
event shall this Warrant be sold, transferred, assigned or hypothecated
except in conformity with the applicable provisions of the Act as then in
force or any similar Federal statute then in force, and all applicable "Blue
Sky" laws.
9. The Holder of this Warrant, by acceptance hereof, agrees that,
prior to the disposition of this Warrant or of any Underlying Securities
theretofore purchased upon the exercise hereof, under circumstances that
might require registration of such securities under the Act, or any similar
Federal statute then in force, such Holder will give written notice to the
Company expressing such Holder's intention of effecting such disposition, and
describing briefly such Holder's intention as to the disposition to be made
of this Warrant and/or the Underlying Securities theretofore issued upon
exercise hereof. Promptly upon receiving such notice, the Company shall
present copies thereof to its counsel and the provisions of the following
subdivisions shall apply:
(a) If, in the opinion of such counsel, the proposed disposition
does not require registration under the Act, or any similar Federal statute
then in force, of this Warrant and/or the securities issuable or issued upon
the exercise of this Warrant, the Company shall, as promptly as practicable,
notify the Holder hereof of such opinion, whereupon such Holder shall be
entitled to dispose of this Warrant and/or such Underlying Securities
theretofore issued upon the exercise hereof, all in accordance with the terms
of the notice delivered by such Holder to the Company.
(b) If, in the opinion of such counsel, such proposed disposition
requires such registration or qualification under the Act, or similar Federal
statute then in force, of this Warrant and/or the Underlying Securities
issuable or issued upon the exercise of this Warrant, the Company shall
promptly give written notice of such opinion to the Holder hereof and to the
then holders of the securities theretofore issued upon the exercise of this
Warrant at the respective addresses thereof shown on the books of the
Company. Section 15 of the Underwriting Agreement contains certain
registration rights which are incorporated herein by reference in their
entirety.
10. Whenever, pursuant to Section 9 hereof, a registration statement
relating to the Underwriters' Warrant or Underlying Securities is filed under
the Act, the Company agrees to indemnify and hold harmless the Holder of this
Warrant, or of securities issuable or issued upon the exercise hereof, from
and against any claims and liabilities arising out of or based upon any
untrue statement of a material fact, or omission to state a material fact
required to be stated, in any such
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registration statement or prospectus, except insofar as such claims or
liabilities are caused by any such untrue statement or omission based on
information furnished in writing to the Company by such Holder, or by any
other such Holder affiliated with the Holder who seeks indemnification, as to
which the Holder hereof, by acceptance hereof, agrees to indemnify and hold
harmless the Company, in the same manner as set forth herein.
11. If this Warrant, or any of the securities issuable pursuant hereto,
require qualification or registration with, or approval of, any governmental
official or authority (other than registration under the Act, or any similar
Federal statute at the time in force), before such securities may be issued
on the exercise hereof, the Company, at its expense, will take all requisite
action in connection with such qualification, and will use its best efforts
to cause such securities and/or this Warrant to be duly registered or
approved, as may be required.
12. This Warrant is exchangeable, upon its surrender by the registered
Holder at such office or agency of the Company as may be designated by the
Company, for new Underwriters' Unit Warrants of like tenor, representing, in
the aggregate, the right to subscribe for and purchase the number of Units or
Common Shares as the case may be that may be subscribed for and purchased
hereunder, each of such new Underwriters' Unit Warrants to represent the
right to subscribe for and purchase such number of Units or Common Shares, as
the case may be, as shall be designated by the registered Holder at the time
of such surrender. Upon receipt of evidence satisfactory to the Company of
the loss, theft, destruction or mutilation of this Warrant, and, in the case
of any such loss, theft or destruction, upon delivery of a bond of indemnity
satisfactory to the Company, or in the case of such mutilation, upon
surrender or cancellation of this Warrant, the Company will issue to the
registered Holder a new Underwriters' Unit Warrant of like tenor, in lieu of
this Warrant, representing the right to subscribe for and purchase the number
of Units or Common Shares, as the case may be, that may be subscribed for and
purchased hereunder. Nothing herein is intended to authorize the transfer of
this Warrant except as permitted under Section 8.
13. Every Holder hereof, by accepting the same, agrees with any
subsequent Holder hereof and with the Company that this Warrant and all
rights hereunder are issued and shall be held subject to all of the terms,
conditions, limitations and provisions set forth in this Warrant, and further
agrees that the Company and its transfer agent may deem and treat the
registered Holder of this Warrant as the absolute owner hereof for all
purposes and shall not be affected by any notice to the contrary.
14. All notices required hereunder shall be given by first-class mail,
postage prepaid; if given by the Holder hereof, addressed to the Company at
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio 44718; or such
other address as the Company may designate in writing to the Holder hereof;
and if given by the Company, addressed to the Holder at the address of the
Holder shown on the books of the Company.
15. The Company will not merge or consolidate with or into any other
corporation, or sell or otherwise transfer its property, assets and business
substantially as an entirety to another corporation, unless the corporation
resulting from such merger or consolidation (if not the Company), or such
transferee corporation, as the case may be, shall expressly assume, by
supplemental agreement
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satisfactory in form to the Underwriter, the due and punctual performance and
observance of each and every covenant and condition of this Warrant to be
performed and observed by the Company.
16. The validity, construction and enforcement of this Warrant shall be
governed by the laws of the State of New York without giving effect to the
conflict of laws provisions thereof and jurisdiction is hereby vested in the
Courts of said State in the event of the institution of any legal action
under this Warrant.
IN WITNESS WHEREOF, The Havana Group, Inc. has caused this Warrant to be
signed by its duly authorized officers under its corporate seal, to be dated
_____________, 1998.
THE HAVANA GROUP, INC.
By:
------------------------------
Attest:
- -------------------------
(Corporate Seal)
8
<PAGE>
PURCHASE FORM
To Be Executed
Upon Exercise of Warrant
The undersigned hereby exercises the right to purchase _________Units, each
Unit consisting of one Common Shares and two Underwriters' Class A Warrants
evidenced by the within Warrant, according to the terms and conditions
thereof, and herewith makes payment of the purchase price in full. The
undersigned requests that certificates for such shares and warrants shall be
issued in the name set forth below.
Dated: ,19__/200_ -------------------------------------
Signature
-------------------------------------
Print Name of Signatory
-------------------------------------
Name to whom certificates are to
be issued if different from above
Address:
-----------------------------
-------------------------------------
Social Security No.
------------------
or other identifying number
If said number of shares and warrants shall not be all the shares and
warrants purchasable under the within Warrant, the undersigned requests that
a new Warrant for the unexercised portion shall be registered in the name of:
-------------------------------------
(Please Print)
Address:
-----------------------------
-------------------------------------
Social Security No.
------------------
or other identifying number
-------------------------------------
Signature
9
<PAGE>
FORM OF ASSIGNMENT
FOR VALUE RECEIVED , hereby sells
assigns and transfers to , Soc. Sec. No. [ ]
the within Warrant, together with all rights, title and interest therein, and
does hereby irrevocably constitute and appoint attorney
to transfer such Warrant on the register of the within named Company, with
full power of substitution.
-------------------------------------
Signature
Dated: , 19 / 200
Signature Guaranteed:
- -------------------------------
10
<PAGE>
EXHIBIT4.4
WARRANT AGREEMENT
AGREEMENT, dated as of ________, 1998 between THE HAVANA GROUP, INC.,
a Delaware corporation (the "Company"), and HARRIS TRUST COMPANY OF NEW YORK, as
Warrant Agent (the "Warrant Agent").
W I T N E S S E T H :
WHEREAS, in connection with (i) the offering (the "Initial Public
Offering") to the public of up to 460,000 units (each Unit consisting of one
share of Common Stock and two Class A Warrants) which includes 460,000 shares
(the "Shares"), of the Company's common stock, $.001 par value ("Common
Stock"), and 920,000 Class A Common Stock Purchase Warrants (the "Warrants"),
entitling the holder of each Warrant to purchase one share of Common Stock, (ii)
the over-allotment option granted by Duncan Hill, Inc. ("Duncan Hill") to
purchase up to an additional 69,000 units including 69,000 shares of Common
Stock and 138,000 Warrants (the "Over-Allotment Option"), and (iii) the sale to
VTR Capital, Inc., its successors and assigns ("VTR" or the "Representative") of
warrants (the "Representative's Warrants") to purchase up to 46,000 units
consisting of 46,000 shares of Common Stock and 92,000 Class A Warrants, such
Class A Warrants being identical to the Class A Warrants being sold to the
public except as may be otherwise provided herein (the Warrants issuable upon
the exercise of the Representative's Warrants are referred to as the "Common
Stock Warrants"), the Company will issue up to 1,058,000 Class A Warrants,
192,000 Common Stock Warrants and the Representative's Warrants (subject to
increase as provided in the Representative's Warrant Agreement); and
WHEREAS, the Company is obligated to issue an additional 1,738,000
Class A Warrants to certain existing Warrant holders (including 138,000 Class A
Warrants to Duncan Hill to be sold pursuant to the Over-Allotment option); and
WHEREAS, the Company desires to provide for the issuance of
certificates representing the Warrants and the Common Stock Warrants
(collectively, the Warrants and the Common Stock Warrants shall be referred to
herein as the "Warrants"); and
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing to so act, in connection with the
issuance, registration, transfer and exchange of certificates representing the
Warrants and the exercise of the Warrants.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements hereinafter set forth and for the purpose of defining the terms and
provisions of the Warrants and the respective rights and obligations thereunder
of the Company, the Representative, the holders of certificates representing the
Warrants and the Warrant Agent, the parties hereto agree as follows:
<PAGE>
SECTION 1. Definitions. As used herein, the following terms shall have the
following meanings, unless the context shall otherwise require:
(a) "Common Stock" shall mean stock of the Company of any class,
whether now or hereafter authorized, which has the right to participate in the
voting and in the distribution of earnings and assets of the Company without
limit as to amount or percentage.
(b) "Corporate Office" shall mean the office of the Warrant Agent (or
its successor) at which at any particular time its principal business shall be
administered, which office is located on the date hereof at 430 Park Avenue, New
York, NY 10022.
(c) "Exercise Date" shall mean, subject to the provisions of Section
5(b) hereof, as to any Warrant, the date on which the Warrant Agent shall have
received both (i) the Warrant Certificate representing such Warrant, with the
exercise form thereon duly executed by the Registered Holder hereof or his
attorney duly authorized in writing, and (ii) payment in cash or by check made
payable to the Warrant Agent for the account of the Company, of the amount in
lawful money of the United States of America equal to the applicable Purchase
Price.
(d) "Initial Warrant Exercise Date" shall mean in the case of the
Warrants ________, 1998 and in the case of the Common Stock Warrants ________,
1999.
(e) "Initial Warrant Redemption Date" shall mean ________, 1999.
(f) "Purchase Price" shall mean $5.25 for the Warrants other than the
Warrants issuable upon exercise of the Representative's Warrants, whose Purchase
Price shall be equal to the lesser of 150% of the Purchase Price of the Warrants
then in effect and $7.875, subject in each case to modification and adjustment
as provided in Section 8.
(g) "Registered Holder" shall mean the person in whose name any
certificate representing the Warrants shall be registered on the books
maintained by the Warrant Agent pursuant to Section 6.
(h) The Representative shall mean VTR Capital, Inc.
(i) "Subsidiary" or "Subsidiaries" shall mean any corporation or
corporations, as the case may be, of which stock having ordinary power to elect
a majority of the Board of Directors of such corporation (regardless of whether
or not at the time stock of any other class or classes of such corporation shall
have or may have voting power by reason of the happening of any contingency) is
at the time directly or indirectly owned by the Company or by one or more
Subsidiaries, or by the Company and one or more Subsidiaries.
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<PAGE>
(j) "Transfer Agent" shall mean Harris Trust Company of New York or
its authorized successor.
(k) "Underwriting Agreement" shall mean the underwriting agreement
dated ________, 1998 between the Company and the Representative, relating to the
purchase for resale to the public of the Units.
(l) "Representative's Warrant Agreement" shall mean the agreement(s)
dated as of _________, 1998 between the Company and the Representative relating
to and governing the terms and provisions of the Representative's Warrants.
(m) "Separation Date" shall mean the earlier of _______,1998 or the
date selected by the Representative in writing for Separation. Until the
Separation Date, the Common Stock and Warrants shall not be detachable or
separately transferable.
(n) "Warrant Certificate" shall mean a certificate representing
Warrants substantially in the form annexed hereto as Exhibit A.
(o) "Warrant Expiration Date" shall mean, unless the Warrants are
redeemed as provided in Section 9 hereof prior to such date, 5:00 p.m. (New York
City Time) on ________, 2003, or if such date shall in the State of New York be
a Saturday, Sunday, holiday or a day on which banks are authorized to close,
then 5:00 p.m. (New York City Time) on the next following day which in the State
of New York is not a Saturday, Sunday, holiday or a day on which banks are
authorized to close, subject to the Company's right, prior to the Warrant
Expiration Date, in its sole discretion, to extend such Warrant Expiration Date
on five business days prior written notice to the Registered Holders.
SECTION 2. Warrants and Issuance of Warrant Certificates.
(a) One Warrant shall initially entitle the registered holder of a
Warrant to purchase at the Purchase Price therefor from the Initial Warrant
Exercise Date until the Warrant Expiration Date one share of Common Stock upon
the exercise thereof, subject to modification and adjustment as provided in
Section 8.
(b) Upon execution of this Agreement, Warrant Certificates
representing 1,738,000 Warrants to purchase up to an aggregate of 1,738,000
shares of Common Stock and 460,000 Units shall be executed by the Company and
delivered to the Warrant Agent. On the Separation Date, the Units will be
exchanged for 460,000 shares of Common Stock and 920,000 Warrants to purchase
920,000 shares of Common Stock (subject to modification and adjustment as
provided in Section 8) shall be executed by the Company and delivered to the
Warrant Agent.
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<PAGE>
(c) Upon exercise of the Representative's Warrants as provided
therein, Warrant Certificates representing 92,000 Common Stock Warrants to
purchase up to an aggregate of 92,000 shares of Common Stock (subject to
modification and adjustment as provided in Section 8 hereof and in the
Representative's Warrant Agreement), shall be countersigned, issued and
delivered by the Warrant Agent upon written order of the Company signed by its
Chairman of the Board, Chief Executive Officer, or President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary.
(d) From time to time until the Warrant Expiration Date, the
Warrant Agent shall countersign and deliver Warrant Certificates in required
denominations of one or whole number multiples thereof to the person entitled
thereto in connection with any transfer or exchange permitted under this
Agreement. Except as provided in Section 7 hereof, no Warrant Certificates
shall be issued except (i) Warrant Certificates initially issued hereunder, (ii)
Warrant Certificates issued upon any transfer or exchange of Warrants, (iii)
Warrant Certificates issued in replacement of lost, stolen, destroyed or
mutilated Warrant Certificates pursuant to Section 7, (iv) Warrant Certificates
issued pursuant to the Representative's Warrant Agreement and (v) at the option
of the Company, Warrant Certificates in such form as may be approved by its
Board of Directors, to reflect any adjustment or change in the Purchase Price,
the number of shares of Common Stock purchasable upon exercise of the Warrants
or the Redemption Price therefor made pursuant to Section 8 hereof.
SECTION 3. Form and Execution of Warrant Certificates.
(a) The Warrant Certificates evidencing the Warrants shall be
substantially in the form annexed hereto as Exhibit A (the provisions of which
are hereby incorporated herein), and may have such letters, numbers or other
marks of identification or designation and such legends, summaries or
endorsements printed, lithographed or engraved thereon as the Company may deem
appropriate and as are not inconsistent with the provisions of this Agreement,
or as may be required to comply with any law or with any rule or regulation
made pursuant thereto or with any rule or regulation of any stock exchange on
which the Warrants may be listed, or to conform to usage. The Warrant
Certificates shall be dated the date of issuance thereof (whether upon initial
issuance, transfer, exchange or in lieu of mutilated, lost, stolen or destroyed
Warrant Certificates).
(b) Warrant Certificates shall be executed on behalf of the Company
by its Chairman of the Board, Chief Executive Officer, or President and by its
Treasurer or an Assistant Treasurer or its Secretary or an Assistant Secretary,
by manual signatures or by facsimile signatures printed thereon. Warrant
Certificates shall be manually countersigned by the Warrant Agent and shall not
be valid for any purpose unless so countersigned. In case any officer of the
Company who shall have signed any of the Warrant Certificates shall cease to be
such officer of the Company before the date of issuance of the Warrant
Certificates or before countersignature by the Warrant Agent and issue and
delivery thereof, such Warrant Certificates, nevertheless, may be countersigned
by the Warrant
4
<PAGE>
Agent, issued and delivered with the same force and effect as though the person
who signed such Warrant Certificates had not ceased to be such officer of the
Company.
SECTION 4. Exercise.
(a) Warrants in denominations of one or whole number multiples
thereof may be exercised commencing at any time on or after the Initial Warrant
Exercise Date, but not after the Warrant Expiration Date, upon the terms and
subject to the conditions set forth herein (including the provisions set forth
in Sections 5 and 9 hereof) and in the applicable Warrant Certificate. A
Warrant shall be deemed to have been exercised immediately prior to the close of
business on the Exercise Date, provided that the Warrant Certificate
representing such Warrant, with the exercise form thereon duly executed by the
Registered Holder thereof or his attorney duly authorized in writing, together
with payment in cash or by check made payable to the Warrant Agent for the
account of the Company, of an amount in lawful money of the United States of
America equal to the applicable Purchase Price has been received in good funds
by the Warrant Agent. The person entitled to receive the securities deliverable
upon such exercise shall be treated for all purposes as the holder of such
securities as of the close of business on the Exercise Date. If Warrants in
denominations other than one or whole number multiples thereof shall be
exercised at one time by the same Registered Holder, the number of full shares
of Common Stock which shall be issuable upon exercise thereof shall be computed
on the basis of the aggregate number of full shares of Common Stock issuable
upon such exercise. As soon as practicable on or after the Exercise Date and in
any event within five business days after such date, if one or more Warrants
have been exercised, the Warrant Agent on behalf of the Company shall cause to
be issued to the person or persons entitled to receive the same, a Common Stock
certificate or certificates for the shares of Common Stock deliverable upon such
exercise, and the Warrant Agent shall deliver the same to the person or persons
entitled thereto. Upon the exercise of any one or more Warrants, the Warrant
Agent shall promptly notify the Company and the Representative in writing of
such fact and of the number of securities delivered upon such exercise and,
subject to subsection (b) below, shall cause all payments of an amount in cash
or by check made payable to the order of the Company, equal to the Purchase
Price, to be deposited promptly in the Company's bank account.
(b) If at the time of exercise of any Warrant commencing one year
after the date of issuance (i) the market price of the Company's Common Stock is
equal to or greater than the then Purchase Price of the Warrant, (ii) the
exercise of the Warrant is solicited by the Representative or another
broker-dealer who is at such time is a member of the National Association of
Securities Dealers, Inc. ("NASD"), (iii) the Warrant is not held in a
discretionary account, (iv) disclosure of the compensation arrangement is made
in documents provided to the holders of the Warrants, and (v) the solicitation
of the exercise of the Warrant is not in violation of Regulation M (as such rule
or any successor rule may be in effect as of such time of exercise) promulgated
under the Securities Exchange Act of 1934 (the "Exchange Act"), then the
Representative shall be entitled to
5
<PAGE>
receive from the Company upon exercise of each of the Warrants so exercised a
fee (the "Exercise Fee") of five percent (5%) of the aggregate Purchase Price of
the Warrants so exercised commencing in the second year following the date of
issuance. Anything to the contrary in the foregoing notwithstanding, no
Exercise Fee with respect to any Warrants exercised shall be payable to the
Representative if the payment of the Exercise Fee with respect to such Warrants
would be in violation of the General Rules and Regulations promulgated under the
Exchange Act, or the rules and regulations of the NASD or applicable state
securities or "blue sky" laws, or the Warrants are Common Stock Warrants
underlying the Representative's Warrants. The procedures for payment of the
warrant solicitation fee are set forth in Section 5(c) below.
(c) (1) Within ten (10) days after the last day of each month
commencing with ________, 1999, the Warrant Agent will notify the Representative
of each Warrant Certificate which has been properly completed for exercise by
holders of Warrants during the last month. The Company and Warrant Agent shall
determine, in their sole and absolute discretion, whether a Warrant Certificate
has been properly completed. The Warrant Agent will provide the Representative
with such information in connection with the exercise of each Warrant as the
Representative shall reasonably request.
(2) The Company hereby authorizes and instructs the Warrant Agent
to deliver to the Representative the Exercise Fee promptly after receipt by the
Warrant Agent from the Company of a check payable to the order of the
Representative in the amount of the Exercise Fee. In the event that an Exercise
Fee is paid to the Representative with respect to a Warrant which the Company or
the Warrant Agent determines is not properly completed for exercise or in
respect of which the Representative is not entitled to an Exercise Fee, the
Representative will be instructed by the Warrant Agent to return such Exercise
Fee to the Warrant Agent which shall forthwith return such fee to the Company.
While the Warrants are outstanding, the Representative and the Company
may at any time during business hours, examine the records of the Warrant Agent,
including its ledger of original Warrant certificates returned to the Warrant
Agent upon exercise of Warrants. Notwithstanding any provision to the contrary,
the provisions of Section 4(b) and 4(c) may not be modified, amended or deleted
without the prior written consent of the Representative.
(d) The Company shall not be obligated to issue any fractional share
interests or fractional warrant interests upon the exercise of any Warrant or
Warrants, nor shall it be obligated to issue scrip in lieu of fractional
interests. However, the Company shall pay the Registered Holder of any
fractional warrant interest an amount in cash based upon the average of the high
and low bid prices for the Common Stock on the NASD Electronic Bulletin Board
(or if applicable The NASDAQ Stock Market) during the ten day trading period
immediately preceding the date of exercise.
6
<PAGE>
SECTION 5. Reservation of Shares: Listing; Payment of Taxes; etc.
(a) The Company covenants that it will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon exercise of Warrants, such number of shares of Common Stock as
shall then be issuable upon the exercise of all outstanding Warrants. The
Company covenants that all shares of Common Stock which shall be issuable upon
exercise of the Warrants shall, at the time of delivery thereof, be duly and
validly issued and fully paid and nonassessable and free from all preemptive or
similar rights, taxes, liens and charges with respect to the issue thereof, and
that upon issuance such shares shall be listed on each securities exchange, if
any, on which the other shares of outstanding Common Stock of the Company are
then listed.
(b) The Company covenants that if any securities to be reserved for
the purpose of exercise of Warrants hereunder require registration with, or
approval of, any governmental authority under any federal securities law before
such securities may be validly issued or delivered upon such exercise, then the
Company will file a registration statement under the federal securities laws or
a post-effective amendment, use its best efforts to cause the same to become
effective, keep such registration statement current while any of the Warrants
are outstanding and deliver a prospectus which complies with Section 10(a)(3)
of the Securities Act of 1933, as amended, to the Registered Holder exercising
the Warrant. The Company will use its best efforts to maintain appropriate
approvals or registrations under state "blue sky" securities laws in states
where the Initial Public Offering is sold. With respect to any such securities,
however, Warrants may not be exercised by, or shares of Common Stock issued to,
any Registered Holder in any state in which such exercise would be unlawful.
(c) The Company shall pay all documentary, stamp or similar taxes and
other governmental charges that may be imposed with respect to the issuance of
Warrants, or the issuance or delivery of any shares of Common Stock upon
exercise of the Warrants; provided, however, that if shares of Common Stock are
to be delivered in a name other than the name of the Registered Holder of the
Warrant Certificate representing any Warrant being exercised, then no such
delivery shall be made unless the person requesting the same has paid to the
Warrant Agent the amount of transfer taxes or charges incident thereto, if any.
(d) The Warrant Agent is hereby irrevocably authorized as the Transfer
Agent to requisition from time to time certificates representing shares of
Common Stock or other securities required upon exercise of the Warrants, and the
Company will comply with all such requisitions.
7
<PAGE>
SECTION 6. Exchange and Registration of Transfer.
(a) Warrant Certificates may be exchanged for other Warrant
Certificates representing an equal aggregate number of Warrants or may be
transferred in whole or in part. Warrant Certificates to be so exchanged shall
be surrendered to the Warrant Agent at its Corporate Office, and the Company
shall execute and the Warrant Agent shall countersign, issue and deliver in
exchange therefor, the Warrant Certificate or Certificates which the Registered
Holder making the exchange shall be entitled to receive.
(b) The Warrant Agent shall keep, at such office, books in which,
subject to such reasonable regulations as it may prescribe, it shall register
Warrant Certificates and the transfer thereof. Upon due presentment for
registration of transfer of any Warrant Certificate at such office, the Company
shall execute and the Warrant Agent shall issue and deliver to the transferee or
transferees a new Warrant Certificate or Certificates representing an equal
aggregate number of Warrants.
(c) With respect to any Warrant Certificates presented for
registration of transfer, or for exchange or exercise, the subscription of
exercise form, as the case may be, on the reverse thereof shall be duly endorsed
or be accompanied by a written instrument or instruments of transfer and
subscription, in form satisfactory to the Company and the Warrant Agent, duly
executed by the Registered Holder thereof or his attorney duly authorized in
writing.
(d) No service charge shall be made for any exchange or registration
of transfer of Warrant Certificates. However, the Company may require payment
of a sum sufficient to cover any tax or other governmental charge that may be
imposed in connection therewith.
(e) All Warrant Certificates surrendered for exercise or for exchange
shall be promptly cancelled by the Warrant Agent.
(f) Prior to due presentment for registration or transfer thereof,
the Company and the Warrant Agent may deem and treat the Registered Holder of
any Warrant Certificate as the absolute owner thereof of each Warrant
represented thereby (notwithstanding any notations of ownership or writing
thereon made by anyone other than the Company or the Warrant Agent) for all
purposes and shall not be affected by any notice to the contrary.
SECTION 7. Loss or Mutilation. Upon receipt by the Company and the Warrant
Agent of evidence satisfactory to them of the ownership of and the loss, theft,
destruction or mutilation of any Warrant Certificate and (in the case of loss,
theft or destruction) of indemnity satisfactory to them, and (in case of
mutilation) upon surrender and cancellation thereof, the Company shall execute
and the Warrant Agent shall countersign and deliver in lieu thereof a new
Warrant Certificate representing an equal aggregate number of
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<PAGE>
Warrants. Applicants for a substitute Warrant Certificate shall also comply
with such other reasonable regulations and pay such other reasonable charges as
the Warrant Agent may prescribe.
SECTION 8. Adjustment of Purchase Price and Number of Shares of Common Stock
Deliverable.
(a) (i) Except as hereinafter provided, in the event the Company shall, at any
time or from time to time after the date hereof, issue any shares of Common
Stock as a stock dividend to the holders of Common Stock, or subdivide or
combine the outstanding shares of Common Stock into a greater or lesser number
of shares (any such issuance, subdivision or combination being herein called a
"Change of Shares"), then, and thereafter immediately before the date of such
sale or the record date for each Change of Shares, the Purchase Price for the
Warrants (whether or not the same shall be issued and outstanding) in effect
immediately prior to such Change of Shares shall be changed to a price
(including any applicable fraction of a cent to the nearest cent) determined by
dividing (1) the product of (a) the Purchase Price in effect immediately before
such Change of Shares and (b) the total number of shares of Common Stock
outstanding immediately prior to such Change of Shares, by (2) the total number
of shares of Common Stock outstanding immediately after such Change of Shares.
(ii) Upon each adjustment of the Purchase Price pursuant to this
Section 8, the number of shares of Common Stock purchasable upon the exercise of
each Warrant shall be the number derived by multiplying the number of shares of
Common Stock purchasable immediately prior to such adjustment by the Purchase
Price in effect prior to such adjustment and dividing the product so obtained by
the applicable adjusted Purchase Price.
(b) In case of any reclassification or change of outstanding shares of
Common Stock issuable upon exercise of the Warrants (other than a change in par
value, or from par value to no par value, or as a result of subdivision or
combination), or in case of any consolidation or merger of the Company with or
into another corporation (other than a merger with a subsidiary in which merger
the Company is the continuing corporation and which does not result in any
reclassification or change of the then outstanding shares of Common Stock or
other capital stock issuable upon exercise of the Warrants) or in case of any
sale or conveyance to another corporation of the property of the Company as an
entirety or substantially as an entirety, then, as a condition of such
reclassification, change, consolidation, merger, sale or conveyance, the
Company, or such successor or purchasing corporation, as the case may be, shall
make lawful and adequate provision whereby the Registered Holder of each Warrant
then outstanding shall have the right thereafter to receive on exercise of such
Warrant, the kind and amount of securities and property receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a holder
of the number of securities issuable upon exercise of such Warrant immediately
prior to such reclassification, change, consolidation, merger, sale
9
<PAGE>
or conveyance and shall forthwith file at the Corporate Office of the Warrant
Agent, a statement signed by its Chairman, Chief Executive Officer or President
and by its Treasurer or an Assistant Treasurer or its Secretary or an Assistant
Secretary evidencing such provision. Such provisions shall include provision
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 8(a). The above provisions of this Section
8(b) shall similarly apply to successive reclassifications and changes of shares
of Common Stock and to successive consolidations, mergers, sales or conveyances.
(c) Irrespective of any adjustments or changes in the Purchase Price or
the number of shares of Common Stock purchasable upon exercise of the Warrants,
the Warrant Certificates theretofore and thereafter issued shall, unless the
Company shall exercise its option to issue new Warrant Certificates pursuant to
Section 2(e) hereof, continue to express the Purchase Price per share and the
number of shares purchasable thereunder as the Purchase Price per share and the
number of shares purchasable thereunder were expressed in the Warrant
Certificates when the same were originally issued.
(d) After each adjustment of the Purchase Price pursuant to this Section
8, the Company will promptly prepare a certificate signed by the Chairman, Chief
Executive Officer or President, and by the Treasurer or an Assistant Treasurer
or the Secretary or an Assistant Secretary, of the Company setting forth: (i)
the Purchase Price as so adjusted, (ii) the number of shares of Common Stock
purchasable upon exercise of each Warrant, after such adjustment, and (iii) a
brief statement of the facts accounting for such adjustment. The Company will
promptly file such certificate with the Warrant Agent and cause a brief summary
thereof to be sent by ordinary first class mail to each Registered Holder at his
last address as it shall appear on the registry books of the Warrant Agent. No
failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity thereof. The affidavit of an officer of the Warrant
Agent or the Secretary or an Assistant Secretary of the Company that such notice
has been mailed shall, in the absence of fraud, be prima facie evidence of the
facts stated therein.
(e) No adjustment of the Purchase Price shall be made as a result of
or in connection with the issuance or sale of shares of Common Stock if the
amount of said adjustment shall be less than $.05 for one share of Common Stock;
provided, however, that in such case, any adjustment that would otherwise be
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment that shall amount, together
with any adjustment so carried forward, to at least $.05 for one share of Common
Stock. In addition, Registered Holders shall not be entitled to cash dividends
paid by the Company prior to the exercise of any Warrant or Warrants held by
them.
10
<PAGE>
SECTION 9. Redemption.
(a) Commencing on or after the Initial Warrant Redemption Date, the
Company may redeem all the Warrants at $.10 per Warrant on at least 30 days
prior written notice to the Registered Holders of the Warrants, commencing on
the Initial Warrant Redemption Date; provided, however, that before any such
call for redemption of Warrants can take place, the Market Price of the Common
Stock for twenty (20) consecutive trading days ending within 15 days of the
notice of redemption shall be $10.50, subject to adjustment in the event of any
stock splits or other similar events as provided in Section 8 hereof. All
Warrants must be redeemed if any are redeemed. For purposes of this Section 9,
the "Market Price" of the Common Stock for any trading day means the last sale
price for the Common Stock on The OTC Electronic Bulletin Board or The NASDAQ
Stock Market if quoted thereon.
(b) In the event the Company exercises its right to redeem all of the
Warrants, it shall give or cause to be given notice to the Registered Holders of
the Warrants, by mailing to such Registered Holders a notice of redemption,
first class, postage prepaid, within fifteen (15) calendar days of the
aforementioned twenty (20) consecutive trading days and at least by the
thirtieth (30th) day before the date fixed for redemption, at their last address
as shall appear on the records of the Warrant Agent. Any notice mailed in the
manner provided herein shall be conclusively presumed to have been duly given
whether or not the Registered Holder receives such notice. At the time of the
mailing to the Registered Holders of the Warrants of the notice of redemption,
the Company shall deliver or cause to be delivered to the Representative a
similar notice telephonically and confirmed in writing together with a list of
the Registered Holders (including their respective addresses and number of
Warrants beneficially owned) to whom such notice of redemption has been or will
be given.
(c) The notice of redemption, which may not be mailed until on or
after the Initial Warrant Redemption Date, shall specify (i) the redemption
price, (ii) the date fixed for redemption, (iii) the place where the Warrant
Certificate shall be delivered and the redemption price shall be paid, (iv) that
the Representative is the Company's exclusive warrant solicitation agent and
shall receive the commission contemplated by Section 4(b) hereof, and (v) that
the right to exercise the Warrant shall terminate a 5:00 p.m. (New York City
Time) on the business day immediately preceding the date fixed for redemption.
The date fixed for the redemption of the Warrants shall be the Redemption Date.
No failure to mail such notice nor any defect therein or in the mailing thereof
shall affect the validity of the proceedings for such redemption except as to a
Registered Holder (a) to whom notice was not mailed or (b) whose notice was
defective. An affidavit of the Warrant Agent or the Secretary or Assistant
Secretary of the Company that notice of redemption has been mailed shall, in the
absence of fraud, be prima facie evidence of the facts stated therein.
(d) Any right to exercise a Warrant shall terminate at 5:00 p.m. (New
York City Time) on the business day immediately preceding the Redemption Date.
The
11
<PAGE>
redemption price payable to the Registered Holders shall be mailed to such
persons at their addresses of record.
(e) The Company shall indemnify the Representative and each person, if
any, who controls the Representative within the meaning of Section 15 of the Act
or Section 20(a) of the Exchange Act against all loss, claim, damage, expense or
liability (including all expenses reasonably incurred in investigating,
preparing or defending against any claim whatsoever) to which any of them may
become subject under the Act, the Exchange Act or otherwise, arising from the
registration statement or prospectus referred to in Section 5(b) hereof to the
same extent and with the same effect (including the provisions regarding
contribution) as the provisions pursuant to which the Company has agreed to
indemnify the Representative contained in Sections 6 and 7 of the Underwriting
Agreement.
(f) The Company shall as soon as practicable after the Redemption
Date, and in any event within 15 months thereafter, make "generally available to
its security holders" (within the meaning of Rule 158 under the Act) an earnings
statement (which need not be audited) complying with Section ll(a) of the Act
and covering a period of at least 12 consecutive months beginning after the
Redemption Date.
(g) The Company shall deliver within five (5) business days prior to
the Redemption Date, copies of all correspondence between the Securities and
Exchange Commission ("Commission") and the Company, its counsel or auditors and
all memoranda relating to discussions with the Commission or its staff with
respect to such registration statement and permit the Representative to do such
investigation, upon reasonable advance notice, with respect to information
contained in or omitted from the registration statement as it deems reasonably
necessary to comply with applicable securities laws or rules of the NASD. Such
investigation shall include access to books, records and properties and
opportunities to discuss the business of the Company with its officers and
independent auditors, all to such reasonable extent and at such reasonable times
and as often as the Representative shall reasonably request.
SECTION 10. Concerning the Warrant Agent.
(a) The Warrant Agent acts hereunder as agent and in a ministerial
capacity for the Company and the Representative, and its duties shall be
determined solely by the provisions hereof. The Warrant Agent shall not, by
issuing and delivering Warrant Certificates or by any other act hereunder, be
deemed to make any representations as to the validity or value or authorization
of the Warrant Certificates or the Warrants represented thereby or of any
securities or other property delivered upon exercise of any Warrant or whether
any stock issued upon exercise of any Warrant is fully paid and nonassessable.
12
<PAGE>
(b) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of Warrant Certificates to make or cause to be made
any adjustment of the Purchase Price provided in this Agreement, or to determine
whether any fact exists which may require any such adjustment, or with respect
to the nature or extent of any such adjustment, when made, or with respect to
the method employed in making the same. It shall not (i) be liable for any
recital or statement of fact contained herein or for any action taken, suffered
or omitted by it in reliance on any Warrant Certificate or other document or
instrument believed by it in good faith to be genuine and to have been signed or
presented by the proper party or parties, (ii) be responsible for any failure on
the part of the Company to comply with any of its covenants and obligations
contained in this Agreement or in any Warrant Certificate, or (iii) be liable
for any act or omission in connection with this Agreement, except for its own
gross negligence or willful misconduct.
(c) The Warrant Agent may at any time consult with counsel
satisfactory to it (who may be counsel for the Company) and shall incur no
liability or responsibility for any action taken, suffered or omitted by it in
good faith in accordance with the opinion or advice of such counsel.
(d) Any notice, statement, instruction, request, direction, order or
demand of the Company shall be sufficiently evidenced by an instrument signed by
the Chairman of the Board of Directors, Chief Executive Officer or President
(unless other evidence in respect thereof is herein specifically prescribed).
The Warrant Agent shall not be liable for any action taken, suffered or omitted
by it in accordance with such notice, statement, instruction, request,
direction, order or demand.
(e) The Company agrees to pay the Warrant Agent reasonable
compensation for its services hereunder and to reimburse it for its reasonable
expenses hereunder; the Company further agrees to indemnify the Warrant Agent
and save it harmless against any and all losses, expenses and liabilities,
including judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution of its duties and powers hereunder except losses,
expenses and liabilities arising as a result of the Warrant Agent's gross
negligence or willful misconduct.
(f) The Warrant Agent may resign its duties and be discharged from all
further duties and liabilities hereunder (except liabilities arising as a result
of the Warrant Agent's own gross negligence or willful misconduct), after giving
60 days prior written notice to the Company. At least 30 days prior to the date
such resignation is to become effective, the Warrant Agent shall cause a copy of
such notice of resignation to be mailed to the Registered Holder of each Warrant
Certificate at the Company's expense. Upon such resignation the Company shall
appoint in writing a new warrant agent. If the Company shall fail to make such
appointment within a period of 60 days after it has been notified in writing of
such resignation by the resigning Warrant Agent, then the Registered Holder of
any Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a new warrant agent. Any new warrant agent, whether appointed by
the
13
<PAGE>
Company or by such a court, shall be a bank or trust company having a capital
and surplus, as shown by its last published report to its stockholders, of not
less than $10,000,000 or a stock transfer company doing business in New York,
New York. After acceptance in writing of such appointment by the new warrant
agent is received by the Company, such new warrant agent shall be vested with
the same powers, rights, duties and responsibilities as if it had been
originally named herein as the warrant agent, without any further assurance,
conveyance, act or deed; but if for any reason it shall be necessary or
expedient to execute and deliver any further assurance, conveyance, act or deed,
the same shall be done at the expense of the Company and shall be legally and
validly executed and delivered by the resigning Warrant Agent. Not later than
the effective date of any such appointment the Company shall file notice thereof
with the resigning Warrant Agent and shall forthwith cause a copy of such notice
to be mailed to the Registered Holder of each Warrant Certificate.
(g) Any corporation into which the Warrant Agent or any new warrant
agent may be converted or merged, any corporation resulting from any
consolidation to which the Warrant Agent or any new warrant agent shall be a
party, or any corporation succeeding to the corporate trust business of the
Warrant Agent or any new warrant agent shall be a successor warrant agent under
this Agreement without any further act, provided that such corporation is
eligible for appointment as successor to the Warrant Agent under the provisions
of the preceding paragraph. Any such successor warrant agent shall promptly
cause notice of its succession as warrant agent to be mailed to the Company and
to the Registered Holders of each Warrant Certificate.
(h) The Warrant Agent, its Subsidiaries and affiliates, and any of its
or their officers or directors, may buy and hold or sell Warrants or other
securities of the Company and otherwise deal with the Company in the same manner
and to the same extent and with like effect as though it were not Warrant Agent.
Nothing herein shall preclude the Warrant Agent from acting in any other
capacity for the Company or for any other legal entity.
(i) The Warrant Agent shall retain for a period of three years from
the date of exercise any Warrant Certificate received by it upon such exercise,
marked to indicate its cancellation thereof in accordance with Section 6(e)
hereof.
SECTION 11. Modification of Agreement.
The Warrant Agent and the Company may by supplemental agreement make
any changes or corrections in this Agreement without the approval of any holders
of Warrants (i) that they shall deem appropriate to cure any ambiguity or to
correct any defective or inconsistent provision or manifest mistake or error
herein contained; (ii) that they may deem necessary or desirable and which shall
not adversely affect the interests of the holders of Warrant Certificates; (iii)
that they deem necessary or desirable to decrease the Purchase Price as provided
for in Section 1(f) hereof; or (iv) which may be required by law; provided,
however, that this Agreement shall not otherwise be modified,
14
<PAGE>
supplemented or altered in any respect except with the consent in writing of the
Registered Holders representing not less than 50% of the Warrants then
outstanding; provided, further, that no change in the number or nature of the
securities purchasable upon the exercise of any Warrant, or the Purchase Price
(other than a decrease in the Purchase Price as provided in Section l(f)
thereof) therefor, shall be made without the consent in writing of the
Registered Holder of the Warrant Certificate, other than such changes as are
specifically permitted or prescribed by this Agreement as originally executed.
In addition, this Agreement may not be modified, amended or supplemented without
the prior written consent of the Representative, other than (i) to cure any
ambiguity or to correct any provision which is inconsistent or which is a
manifest mistake or error; (ii) to make any such change that is necessary or
desirable and which shall not adversely affect the interests of the
Representative; (iii) to decrease the Purchase Price as provided for in Section
1 (f) hereof; or (iv) except as may be required by law.
SECTION 12. Notices.
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been made when delivered or
mailed first-class postage prepaid, or delivered to a telegraph office for
transmission if to the Registered Holder of a Warrant Certificate, at the
address of such holder as shown on the registry books maintained by the Warrant
Agent; if to the Company at 4450 Belden Village Street, N.W., Canton, Ohio
44718, Attention: Chief Executive Officer, or at such other address as may have
been furnished to the Warrant Agent in writing by the Company; and if to the
Warrant Agent, at its Corporate Office. Copies of any notice delivered pursuant
to this Agreement shall be delivered to the Representative at 17 Battery Park
Plaza, 28th floor, New York, New York 10004, Attention: Lorrette Farris,
President, or at such other addresses as may have been furnished to the Company
and the Warrant Agent in writing.
SECTION 13. Governing Law.
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York without giving effect to conflicts of laws.
SECTION 14. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
Company, the Warrant Agent and their respective successors and assigns and the
holders from time to time of Warrant Certificates or any of them. Except as
hereinafter stated, nothing in this Agreement is intended or shall be construed
to confer upon any other person any right, remedy or claim or to impose upon any
other person any duty, liability or obligation. The Representative is, and shall
at all times irrevocably be deemed to be, third-party beneficiaries of this
Agreement, with full power, authority and standing to enforce the rights granted
to it hereunder.
15
<PAGE>
SECTION 15. Counterparts.
This Agreement may be executed in several counterparts, which taken
together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the first date first above written.
[SEAL]
THE HAVANA GROUP, INC. HARRIS TRUST COMPANY OF
NEW YORK
By: By:
--------------------- -------------------------
William Miller authorized officer
President
16
<PAGE>
Exhibit A
No. THG VOID AFTER _________ , 2003
WARRANTS
WARRANT CERTIFICATE TO
PURCHASE ONE SHARE OF COMMON STOCK
THE HAVANA GROUP, INC.
CUSIP 419209 119
THIS CERTIFIES THAT, FOR VALUE RECEIVED
or registered assigns (the "Registered Holder") is the owner of the number of
Warrants (the "Warrants") specified above. Each Warrant initially entitles the
Registered Holder to purchase, subject to the terms and conditions set forth in
this Certificate and the Warrant Agreement (as hereinafter defined), one fully
paid and non-assessable share of Common Stock, $.001 par value, of The Havana
Group, Inc., a Delaware corporation (the "Company"), at any time from
____________, 1998, and prior to the Expiration Date (as hereinafter defined),
upon the presentation and surrender of this Warrant Certificate with the
Subscription Form on the reverse hereof duly executed, at the corporate office
of Harris Trust Company of New York 430 Park Avenue, New York, NY 10023 as
Warrant Agent, or its successor (the "Warrant Agent"), accompanied by payment of
$5.25, subject
17
<PAGE>
to adjustment (the "Purchase Price"), in lawful money of the United States of
America in cash or by check made payable to the Warrant Agent for the account of
the Company.
This Warrant Certificate and each Warrant represented hereby are
issued pursuant to and are subject in all respects to the terms and conditions
set forth in the Warrant Agreement (the "Warrant Agreement"), dated __________ ,
1998, by and between the Company and the Warrant Agent.
The Purchase Price and the number of shares of Common Stock subject to
purchase upon the exercise of each Warrant represented hereby are subject to
modification or adjustment upon the occurrence of certain events as provided for
in the Warrant Agreement.
Each Warrant represented hereby is exercisable at the option of the
Registered Holder, but no fractional interests will be issued. In the case of
the exercise of less than all the warrants represented hereby, the Company shall
cancel this Warrant Certificate upon the surrender hereof and shall execute and
deliver a new Warrant Certificate or Warrant Certificates of like tenor, which
the Warrant Agent shall countersign, for the balance of such Warrants.
The term "Expiration Date" shall mean 5:00 P.M. New York City Time)
on __________ , 2003. If such date shall in the State of New York be a Saturday,
Sunday, holiday or a day on which the banks are authorized to close, then the
Expiration Date shall mean 5:00 P.M. (New York City Time) the next following day
which in the State of New York is not a Saturday, Sunday, holiday or a day on
which banks are authorized to close.
18
<PAGE>
The Company shall not be obligated to deliver any securities pursuant
to the exercise of this Warrant unless a registration statement under the
Securities Act of 1933, as amended (the "Act"), with respect to such securities
is effective or an exemption thereunder is available. The Company has covenanted
and agreed that, if required by the Act, it will file a registration statement
under the Act, use its best efforts to cause the same to become effective, to
keep such registration statement current, if required under the Act, while any
of the Warrants are outstanding, and deliver a prospectus which complies with
Section 10(a)(3) of the Act to the Registered Holder exercising this Warrant.
This Warrant shall not be exercisable by a Registered Holder in any state where
such exercise would be unlawful.
This Warrant Certificate is exchangeable, upon the surrender hereof by
the Registered Holder at the corporate office of the Warrant Agent, for a new
Warrant Certificate or Warrant Certificates of like tenor representing an equal
aggregate number of Warrants, each of such new Warrant Certificates to represent
such number of Warrants as shall be designated by such Registered Holder at the
time of such surrender. Upon due presentment and payment of any tax or other
charge imposed in connection therewith or incident thereto, for registration of
transfer of this Warrant Certificate at such office, a new Warrant Certificate
of Warrant Certificates representing an equal aggregate number of Warrants will
be issued to the transferee in exchange therefor, subject to the limitations
provided in the Warrant Agreement.
Prior to the exercise of any Warrant represented hereby, the
Registered Holder shall not be entitled to any rights of a stockholder of the
Company, including,
19
<PAGE>
without limitation, the right to vote or to receive dividends or other
distributions, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided in the Warrant Agreement.
Subject to the provisions of the Warrant Agreement, this Warrant may
be redeemed at the option of the Company at a redemption price of $.10 per
Warrant, at any time commencing after _____________ , 1999, provided that the
Market Price (as defined in the Warrant Agreement) of the Common Stock for
twenty (20) consecutive trading days and ending no more than fifteen (15) days
prior to the Notice of Redemption, as defined below, shall have averaged at
least $10.50 per share, subject in each case to adjustment in the event of any
stock splits or similar events. Notice of redemption (the "Notice of
Redemption") shall be given at least thirty days before the date fixed for
redemption, all as provided in the Warrant Agreement. On and after the date
fixed for redemption, the Registered Holder shall have no rights with respect to
this Warrant except to receive the $.10 per Warrant upon surrender of this
Certificate.
Under certain circumstances, VTR Capital, Inc., its successors and
assigns shall be entitled to receive, in connection with the exercise of the
Warrants represented hereby, five percent (5%) of the Purchase Price of the
Warrants so exercised commencing on or after ____________________, 1999.
Prior to due presentment for registration of transfer hereof, the
Company and the Warrant Agent may deem and treat the Registered Holder as the
absolute owner hereof and of each Warrant represented hereby (notwithstanding
any notations of ownership or writing hereon made by anyone other than a duly
authorized officer of the
20
<PAGE>
Company or the Warrant Agent) for all purposes and shall not be affected by any
notice to the contrary, except as provided in the Warrant Agreement.
This Warrant Certificate shall be governed by and construed in
accordance with the laws of the State of New York without giving effect to
conflicts of law principles.
This Warrant Certificate is not valid unless countersigned by the
Warrant Agent.
21
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed, manually or in facsimile by two of its officers thereunto duly
authorized and a facsimile of its corporate seal to be imprinted hereon.
Dated: , 1998
THE HAVANA GROUP, INC.
[SEAL] By:
---------------------------
Name: William L. Miller
Title: President
By:
---------------------------
Name: Christopher Webber
Title: Secretary
COUNTERSIGNED:
HARRIS TRUST COMPANY OF NEW YORK
as Warrant Agent
By:
-------------------------
Name:
Title: Principal
22
<PAGE>
SUBSCRIPTION FORM
-----------------
To Be Executed by the Registered Holder
in Order to Exercise Warrant
The undersigned Registered Holder hereby irrevocably elects to exercise
Warrants represented by this Warrant Certificate, and to purchase the securities
issuable upon the exercise of such Warrants, and requests that certificates for
such Securities shall be issued in name of
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
------------------------
------------------------
------------------------
------------------------
(please print or type name and address)
and be delivered to
------------------------
------------------------
------------------------
------------------------
(please print or type name and address)
and if such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, that a new Warrant Certificate for the balance of such
Warrants be registered in the name of, and delivered to, the Registered Holder
at the address stated below.
23
<PAGE>
IMPORTANT: PLEASE COMPLETE THE FOLLOWING:
1. The exercise of this Warrant was solicited by VTR Capital, Inc. / /
2. The exercise of this Warrant was solicited by
.
------------------------- / /
3. If the exercise of this Warrant was not solicited, please check the
following box. / /
Dated: X
------------------- -----------------------------------
-----------------------------------
-----------------------------------
Address
-----------------------------------
Social Security or Taxpayer
Identification Number
-----------------------------------
Signature Guaranteed
-----------------------------------
24
<PAGE>
ASSIGNMENT
----------
To Be Executed by the Registered Holder
in Order to Assign Warrants
FOR VALUE RECEIVED, , hereby sells, assigns and transfers unto
---------------
PLEASE INSERT SOCIAL SECURITY
OR OTHER IDENTIFYING NUMBER
------------------------
------------------------
------------------------
------------------------
(please print or type name and address)
of the Warrants represented by this Warrant
- --------------------------
Certificate, and hereby irrevocably constitutes and appoints attorney to
transfer this Warrant Certificate on the books of the Company, with full power
of substitution in the premises.
Dated: X
------------------ ------------------------------
Signature Guaranteed
------------------------------
THE SIGNATURE TO THE ASSIGNMENT OR THE SUBSCRIPTION FORM MUST CORRESPOND TO THE
NAME AS WRITTEN UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER AND MUST BE
GUARANTEED BY A MEMBER OF THE MEDALLION SIGNATURE PROGRAM.
25
<PAGE>
EXHIBIT 5.0
Lester Morse P.C.
111 Great Neck Road
Suite 420
Great Neck, NY 11021
Telephone: (516) 487-1446
Facsimile: (516) 487-1452
March 30, 1998
The Havana Group, Inc.
4450 Belden Village Street, N.W., Suite 406
Canton, Ohio 44718
Gentlemen:
You have requested our opinion, as counsel for The Havana Group, Inc., a
Delaware corporation (the "Company"), in connection with the registration
statement on Form SB-2 (No. 333-45863) (the "Registration Statement"), under
the Securities Act of 1933 (the "Act"), filed by the Company with the
Securities and Exchange Commission.
The Registration Statement relates to (i) an offering of up to 529,000
Units (including 69,000 Units to be offered on behalf of Duncan Hill, Inc.
pursuant to the Over-Allotment Option). Each Unit consists of one share of
Common Stock and two Class A Common Stock Purchase Warrants (the "Class A
Warrants") ; (ii) 1,058,000 shares of Common Stock issuable upon exercise of
the Class A Warrants included in the Units (the "Class A Shares"); (iii) the
resale of 1,600,000 Class A Warrants issuable to certain selling security
holders upon conversion of certain outstanding notes and warrants; (iv)
1,600,000 shares of Common Stock issuable upon exercise of the Class A
Warrants referred to in (iii) above by transferees of the selling security
holders; (v) Underwriters' Warrant to purchase 46,000 Units (the
"Underwriters' Option"); (vi) 92,000 shares of Common Stock issuable upon
exercise of the Class A Warrants included in the Underwriters' Option; (vii)
46,000 shares of Common Stock and 92,000 Class A Warrants issuable upon
exercise of the Underwriters' Option and (viii) 400,000 shares of Common
Stock to be offered by selling security holders.
We have examined such records and documents and made such examinations
of law as we have deemed relevant in connection with this opinion. It is our
opinion that:
<PAGE>
The Havana Group, Inc.
Page 2
(1) The Shares, the Class A Warrants and Underwriters' Option and
underlying securities have been duly authorized and, when issued,
delivered and paid for in the manner described in the form of
Underwriting Agreement filed as Exhibit 1 to the Registration
Statement and Underwriters' Option filed as Exhibit 4.3, such
securities will be legally issued and the Shares, when so issued,
delivered and paid for will also be fully paid and nonassessable.
(2) The Class A Shares have been duly authorized, and when issued,
delivered and, paid for upon exercise of the Class A Warrants in the
manner described in the form of Warrant Agreement filed as Exhibit 4.4
to the Registration Statement, will be legally issued, fully paid, and
nonassessable.
(3) The shares of Common Stock and Class A Warrants issuable upon exercise
of the Underwriters' Option and the shares of Common Stock issuable
upon exercise of the Class A Warrants have been duly authorized and,
when issued, delivered and paid for in the manner described in the
Underwriters' Option and Class A Warrants filed as Exhibits 4.3 and
4.1, respectively, to the Registration Statement, will be legally
issued, and when paid for will be fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Registration Statement. In so doing, we do not admit
that we are in the category of persons whose consent is required under
Section 7 of the Act or the rules and regulations of the Securities and
Exchange Commission promulgated thereunder.
Very truly yours,
LESTER MORSE P.C.
/s/ Steven Morse
Steven Morse
SM:ag
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Exhibit 10.3
OSTENDORF
MORRIS
[LOGO]
COLLIERS
International
STANDARD OFFICE LEASE
OSTENDORF-MORRIS COMPANY
LEASE AGREEMENT (herein called the "Lease") entered into as of the__day
of__ , 199_ , between Sun Life Assurance Co. of Canada a Corporation (herein
called "Lessor"), and Duncan Hill Co., Ltd a corporation (herein called
"Lessee").
WITNESSETH:
1. DEMISE. For the rent and term and upon the terms, conditions,
limitations and provisions hereinafter set forth, Lessor leases to Lessee and
Lessee hires from Lessor approximately 6,170 rentable square feet of office
space and 1,200 rentable square feet of retail space (herein called the
"Premises") and identified as Suite Number 406 and a portion of Suite 4408
respectively, as shown outlined and crosshatched in Black, on Exhibit A and
Exhibit B, respectively, attached hereto, in the building known as Belden
Village Tower (herein called the "Building") located at 4450 Belden Village
Street, N.W., Canton, Ohio, 44718.
2. TERM. The term of this Lease shall be two (2) years , beginning on the
1st day of October, 1996, and ending on the 30th day of September, 1998, unless
sooner terminated as hereinafter provided.
3. USE. Lessee shall use and occupy the premises only for office use and
retail sales and for no other purposes.
4. ANNUAL BASE RENT. Lessee shall pay Lessor as rent for the premises, the
sum AS SHOWN ON ATTACHED RIDER ONE PARAGRAPH 41 , payable in advance, without
deduction or set-off, in legal tender of the United States of America, on the
first day of each and every calendar month of the term, at the offices of
Ostendorf-Morris Company (hereinafter called the "Company"), The Diamond
Building, 1100 Superior Avenue, Cleveland, Ohio 44114, or at such other place as
Lessor may, from time to time, in writing designate. Any rent or other sums
payable by Lessee to Lessor under this Lease which are not paid within five (5)
days after they first become due, will be subject to a late charge of five
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percent (5%) of the amount due. Such late charges will be due and payable as
additional rent on or before the next day on which an installment of rent is
due. Any rent, late charges or other sums payable by Lessee to Lessor under this
Lease which are not paid when due will bear interest at a rate equal to eighteen
percent (18%) per annum, such interest to commence on the date that said payment
was first due and payable, or, at the Lessor's election, if a late charge is
assessed, fifteen (15) days after the date said payment was first due and
payable. Such interest will be due and payable as additional rent on or before
the next installment of rent and will accrue until paid from the date thereof.
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6. SECURITY DEPOSIT. Lessee has deposited with Lessor the sum of Six
Thousand One Hundred Ninety Eight and 75/100 Dollars ($ 6,198.75) as security
(herein called the "security deposit" for the full and faithful performance of
every term and provision of this Lease by Lessee. If Lessee defaults in the
performance of any term or provision hereof, including failure to pay any rent,
adjustments to rent, additional rent or other charges which Lessee is or becomes
obligated to pay, or Lessor otherwise suffers any loss, cost, expense or damage
as a result of any default by Lessee hereunder, Lessor may apply the security
deposit in respect to such default. If all or any portion of the security
deposit is so applied, upon demand by Lessor or Company, Lessee shall
immediately deposit with Lessor a sum sufficient to restore the security deposit
to Lessor in full, and failure to do so shall constitute a further default
hereunder. Upon the expiration of the term of this Lease, provided Lessee has
fully performed every term and provision hereof, the security deposit (or amount
thereof then on deposit with Lessor) shall be returned to Lessee. In the event
of any sale of the Building during the term hereof, Lessor may transfer the
security deposit to the new
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owner, and upon such transfer, shall be relieved of any obligation for
return of the security deposit to Lessee. Lessor shall be under no obligation to
segregate the security deposit from its own funds and the security deposit shall
not bear interest.
7. BUILDING SERVICES FOR SUITE 406 ONLY. Provided Lessee is not in default
under any of the terms and provisions of this Lease, and except as otherwise
provided below as to Lessee's obligation to pay for certain services, Lessor
shall furnish Lessee with the following services:
(a) cleaning, janitor and window washing services standard for the
Building;
(b) heating or air-conditioning, subject to the terms hereof, on business
days, from 8:00 A.M. to 6:00 P.M., and on Saturdays, from 8:00 A.M. to 12:00
Noon, standard for the Building. Lessee shall pay for all heating and
air-conditioning requested and furnished prior to or following such hours at
rates to be established from time to time by Lessor, subject to all governmental
rules, regulations and guidelines applicable thereto. All requests for heating
or air-conditioning prior to or following such hours, must be submitted, in
writing, to the Company no later than 2:00 P.M. on the last prior business day;
Lessor shall pay all utilities for HVAC and electric service.
(c) water at standard Building temperatures for normal sanitary purposes
only. Lessee shall pay, at standard Building rates, for water used for other
than normal sanitary purposes and for water wasted;
(d) passenger elevator service on business days, from 8:00 A.M. to 8:00
P.M., and on Saturdays, from 8:00 A.M. to 6:00 P.M.; elevator service via at
least one (1) car per elevator bank at all other times;
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The term "business days", as used in this Paragraph 7, shall mean Monday to
Friday, inclusive, excluding (1) Saturdays (except such portion thereof as is
stipulated specifically in subparagraphs (b) and (d) of this Paragraph 7), (2)
Sundays, and (3) all days observed by the Federal and State governments as legal
holidays.
Lessee shall pay Lessor's charges for water, electrical and other services
within ten (10) days after the rendering by Lessor or Company of each statement
on account thereof.(INCLUDED IN BASE RENT). Failure to pay such charges when
due, or to pay any rent or other charge hereunder when due, shall entitle
Lessor, upon not less than five (5) days' written notice, to discontinue
furnishing water, electrical or other services to Lessee. No discontinuance of
services shall be deemed an eviction or disturbance of Lessee's use and
occupancy of the premises, nor render Lessor liable to Lessee for damages, nor
relieve Lessee from the performance of Lessee's covenants and agreements
hereunder.
Lessee agrees that Lessor shall not be liable for damages, by abatement of
Rent or otherwise, for failure to furnish or delay in furnishing any service, or
for any diminution in the quality or quantity thereof, when such failure or
delay or diminution is occasioned, in whole or in part, by any strike, lockout
or other labor trouble, by inability to secure electricity, gas, water, or other
fuel at the Building after reasonable effort so to do, by any accident or
casualty whatsoever, by act or default of Lessee or other parties, or by any
other cause beyond Lessor's reasonable control; and such failures or delays or
diminution shall not be deemed to constitute an eviction or disturbance of the
Lessee's use and possession of the premises or relieve the Lessee from paying
Rent or performing any of its obligations under this Lease. Lessor also reserves
the right to temporarily suspend, delay, or discontinue furnishing any of the
services to be provided by Lessor under this Lease, without abatement or
diminution in Rent and without any liability to Lessee as a result thereof, for
such inspections, cleaning, repairs, replacements, alterations, improvements or
renewals as may, in Lessor's judgment, be desirable or necessary to be made;
provided that such services shall not, to the extent reasonably feasible, be
suspended for such purposes during Lessee's normal business hours unless Lessor
shall, to the extent reasonably possible under the circumstance, have given
Lessee advance notice of any proposed suspension of services.
8. POSSESSION. Taking possession by Lessee shall be conclusive evidence as
against Lessee that the premises were in good order and satisfactory condition
when Lessee took possession. No representation respecting the condition of the
premises or the Building has been made by Lessor to Lessee unless contained
herein; and no promise of Lessor to prepare, alter, or improve the premises for
Lessee's use and occupancy shall be binding upon Lessor unless contained herein
or in Lessor's Work Letter, which Work Letter, if any, has been signed by Lessor
and Lessee and is attached hereto and made a part hereof.
If Lessor is required to perform any space preparation work in the premises
pursuant to a Work Letter, Lessee's obligation to pay the rent reserved
hereunder shall commence upon the date that Lessor has substantially completed
the work specified therein and has so notified Lessee, in writing, or if
Lessor's space preparation work has been delayed due to an act or omission of
Lessee, then at such earlier dare as the work would have been completed but for
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such act or omission. If such date shall be other than the first day of a
calendar month, the rent for such month shall be prorated on a per-diem basis.
If, with Lessor's consent, Lessee is allowed to occupy or enter the
premises prior to the date of the commencement of the term of this Lease, then
all provisions hereof shall be in full force and effect as soon as Lessee
occupies the premises, and Lessee shall immediately commence paying rent on a
per-diem basis to the date of commencement of the term.
If Lessor shall be unable to deliver possession of the premises on the date
of the commencement of the term hereby created because of the holding over of
any tenant, or tenants, or for any other cause beyond Lessor's reasonable
control, then the payment of rent shall not commence until the date possession
of the premises is delivered to Lessee. Lessee agrees to accept such allowance
and abatement of rent as liquidated damages, in full satisfaction for the
failure of Lessor to deliver possession on the date of the commencement of the
term, and to the exclusion of all claims and rights which Lessee might otherwise
have by reason of delivery of possession not being made on that date. Failure to
deliver possession on the date of commencement of the term shall not, in any
event, extend or be deemed to extend, the term of this Lease. Unfinished extra
work, if any, undertaken by Lessor for Lessee shall not be considered in
determining the date of delivery of possession to Lessee.
This Lease does not grant any possessory or other rights to light or air
over property except over public streets kept open by public authority, and
Lessor shall not be liable to Lessee for any expense, injury, loss, or damages
resulting from work done in or upon, or by reason of the use of, any adjacent or
nearby building, land, street, or alley.
Lessor and Lessee agree that (a) Lessee shall have the right to place in
the premises, at such locations therein as Lessee may, from time to time,
determine without overloading floors, Lessee's furniture, trade fixtures and
standard business office machines and equipment; and (b) the foregoing types of
personal property shall be and remain the property of Lessee, and may be removed
by Lessee at any time during the lease term, upon its expiration, or upon its
earlier termination in any manner, Lessee, however, agreeing to repair, at
Lessee's expense, any damage to the premises or the Building caused by such
removal.
9. SURRENDER OF POSSESSION. Upon the expiration of the term or upon the
termination of Lessee's right of possession, whether by lapse of time or at the
option of Lessor as herein provided, Lessee shall, at Lessee's sole cost and
expense, forthwith surrender the premises to Lessor in good order, repair and
condition, ordinary wear excepted, and shall, at Lessee's sole cost and expense,
if Lessor so requires, restore the premises to the condition existing at the
beginning of the term. Any interest of Lessee in the alterations, improvements,
and additions to the premises made or paid for by Lessor or Lessee shall,
without compensation to Lessee, become Lessor's property at the termination of
this Lease by lapse of time or otherwise, and such alterations, improvements,
and additions (including floor coverings) shall be relinquished to Lessor in
good condition, ordinary wear excepted. Prior to the termination of the term of
Lessee's right of possession, Lessee shall remove its office furniture, trade
fixtures, office equipment, and all other items of Lessee's property on the
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premises. Lessee shall pay to Lessor, upon demand, the cost of repairing
any damage to the premises and to the Building caused by any such removal. If
Lessee shall fail or refuse to remove any such property from the premises,
Lessee shall be conclusively presumed to have abandoned the same, and title
thereto shall thereupon pass to Lessor without any cost either by set-off,
credit, allowance, or otherwise, and Lessor may, at its option, accept the title
to such property or, at Lessee's expense, may (a) remove the same or any part in
any manner that Lessor shall choose, repairing any damage to the premises caused
by such removal, and (b) store, destroy, or otherwise dispose of the same
without incurring liability to Lessee or any other person.
10. USE AND OCCUPANCY. In the use and occupancy of the premises, Lessee
shall:
(a) comply with all laws, ordinances, rules, regulations, and orders of any
governmental authorities having jurisdiction over the premises or over the use
and occupancy thereof;
(b) keep and maintain the premises in good order, condition and repair, and
promptly make all repairs or replacements becoming necessary during the term,
including, but without limitation, repairs or replacements of doors, glass
(which shall be replaced with glass of the same size and quality), electrical,
plumbing and sewage lines, equipment and fixtures within, and solely serving the
premises, interior walls, floor covering and ceilings and building appliances of
every kind;
(c) at Lessee's expense, promptly cause to be repaired by a contractor
approved by Lessor any damage to the Building or the premises which results or
arises from Lessee's use and occupancy of the premises;
(d) not install in the premises any apparatus or equipment which shall
interfere with or impair the maintenance or operation of any building system,
including, without limitation, the electrical, plumbing, heating, ventilating,
and air-conditioning systems;
(e) except with the prior written consent of Lessor, not install in the
premises any additional or supplementary air-conditioning equipment; and
(f) not conduct any activity or install in the premises any apparatus or
equipment which shall result (i) in the cancellation of any insurance covering
or relating to the Building, or (ii) without Lessor's prior written approval, in
any increase in insurance premiums in respect of any insurance covering or
relating to the Building. If Lessee shall conduct any activity or install any
apparatus or equipment which shall result in an increase in insurance premiums,
Lessee shall forthwith reimburse Lessor for the amount of the increase in the
insurance premiums;
(g) not to place, permit, or suffer any lien to attach to this Lease or the
leasehold estate created hereby;
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(h) not permit any so-called hazardous or toxic wastes or substances (as
defined under any applicable law) to be placed or maintained within the premises
or the Building unless otherwise approved by Lessor in writing.
In the event that Lessee does not timely perform its repair, replacement or
maintenance obligations hereunder, Lessor may, but shall not be obligated to,
perform any such repairs or replacements, or maintain the premises and the cost
and expense of such repair, replacement or maintenance shall be borne by Lessee
as additional rent hereunder due and payable with the next due installment of
rent.
11. ACCESS TO BUILDING. Lessee, for Lessee and for Lessee's agents,
employees, and invitees, agrees that all such persons desiring to enter or leave
the Building at other than normal business hours in the Building from Monday to
Saturday, both inclusive, and during all hours on Sundays and on all days
observed by the Federal and State governments as legal holidays, shall use such
entrances or exits as may be designated by Lessor, and shall comply with
Building security regulations established from time to time by Lessor with
respect to identification, registration and method of signaling for admission,
so as to establish the right of such persons to enter or to leave the Building.
12. COMMON AREAS. Lessee and Lessee's agents, employees and invitees shall
have the right to use, in common with Lessor and Lessor's tenants and the
agents, employees, and invitees of each, the public sidewalks, entrances,
lobbies, vestibules, stairways, corridors, elevators, public toilets, and other
public areas of the Building, subject, however, to applicable Building rules,
regulations, and security measures; and Lessee and Lessee's agents, employees,
and invitees shall not obstruct or litter, or use for storage, temporary or
otherwise, or for the display of merchandise or services, or for any purpose
other than the intended or normal purpose, any of the public sidewalks,
entrances, lobbies, vestibules, stairways, corridors, elevators, public toilets,
and other public areas of the Building; and no floor mats or runners shall be
placed by Lessee in any Building corridor, lobby or vestibule. Lessee shall not,
at any time, place, leave, or discard any rubbish, paper, articles, or other
objects of any kind whatsoever outside the doors of the premises or in the
corridors or other common areas of the Building.
13. ALTERATIONS AND ADDITIONS. (a) Lessee shall not, without the prior
written consent of Lessor, which consent shall be at Lessor's sole discretion,
make any alterations, improvements, or additions to the premises.
Notwithstanding Lessor's consent to any alteration, improvement or addition to
the premises, Lessor shall retain the option, upon the termination of this
Lease, of requiring Lessee, at its sole cost and expense, to remove any or all
of said alterations, improvements or additions and repair all the damage caused
by such removal. If Lessor consents to any alterations, improvements, or
additions, Lessor may impose such conditions with respect thereto as Lessor
deems appropriate, including, without limitation, requiring Lessee to furnish
Lessor with insurance against liabilities which may arise out of such work and
plans and specifications and permits necessary for such work. The work necessary
to make any alterations, improvements, or additions to the premises, whether
prior
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to or subsequent to the Commencement Date, shall be done at Lessee's
expense by contractors hired by Lessor, or the Company, except to the extent
Lessor gives its prior written consent to Lessee's hiring its own contractors,
which consent shall be solely within Lessor's discretion. If Lessor shall so
desire, Lessee shall submit to Lessor's or the Company's reasonable supervision
of Lessee's work at Lessee's expense. Lessee shall also pay Lessor for all other
costs and expenses arising in connection with such work, including, without
limitation, additional janitorial, elevator, security, and utility expense.
Lessee shall promptly pay to Lessor, the Company, or the Lessee's contractors,
as the case may be, when due, the cost of all such work, supervision, and other
charges.
(b) Upon completion of such work, or from time to time as Lessor may reasonably
require, Lessee shall deliver to Lessor, if payment is made directly to
contractors, evidence of payment, contractors' affidavits and full and final
waivers of all liens for labor, services, or materials all in form satisfactory
to Lessor. Lessee shall defend and hold Lessor harmless from all costs, damages,
liens and expenses related to such work Lessee further covenants and agrees not
to suffer or permit any mechanics or materialmen liens or any other liens to be
placed against the Building or premises with respect to work or services claimed
to have been performed for, or materials claimed to have been furnished to, the
Lessee or the premises. If any lien shall at any time be filed against the
Building or premises in connection with such work, services, or materials,
Lessee shall immediately cause it to be released and removed of record. If
Lessee fails to do so, Lessor may, at Lessor's option, cause the same to be
released and removed of record using funds from the security deposit provided
for in Paragraph 6 of this Lease. If such funds are insufficient for such
purpose, Lessor may, at Lessor's option, advance such additional funds for such
purpose. In addition to Lessee's obligation to replenish the security deposit as
provided in Paragraph 6, Lessee shall immediately, upon demand, pay Lessor the
amount of any such additional funds so advanced.
(c) All work done by Lessee, or its contractors, pursuant to this Lease shall be
done in a first-class workmanlike manner using only good grades of materials,
and shall comply with all insurance requirements and all applicable laws and
ordinances and rules and regulations of governmental departments or agencies.
All such work shall be performed so as not to interfere with or impair the use
and enjoyment of the Building by Lessor and other tenants, and Lessor may
require all or a portion of such world be performed outside business hours.
Subject to Lessor's option contained in the second sentence of subparagraph a)
of this Paragraph 13, all additions, alterations, fixtures, and improvements
(temporary or permanent) in and upon the premises, whether installed by Lessee
or Lessor, shall become Lessor's property, and shall remain upon, and be
surrendered with the premises without disturbance or injury upon the termination
of this Lease by lapse of time or otherwise, all without payment or credit to
Lessee.
14 ASSIGNMENT AND SUBLETTING. (a) Lessee shall not sublet the premises or
any part thereof, not assign this Lease or any interest therein, nor permit any
business to be operated in or from the premises by any person, firm or
corporation other than Lessee, without, in each case, first obtaining the prior
written consent of Lessor, which consent may be given or withheld in Lessor's
sole discretion. Any attempt to assign this Lease or to sublet all or any
portion of the premises, without Lessor's prior written consent, shall be void
and, at
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Lessor's option, shall constitute an event of default under this Lease.
Any merger, consolidation, liquidation, or sale of substantially all of the
assets of Lessee, or any other assignment, transfer, mortgage, pledge or
encumbrance of this Lease or any interest therein, whether voluntary,
involuntary, by operation of law or otherwise, shall constitute an assignment of
this Lease.
(b) Lessor may impose such conditions to its consent to any subletting or
assignment (which may be withheld by Lessor in its sole discretion) as it may
determine, and notwithstanding any consent to assignment or subletting, both
Lessee and its guarantor, if any, will continue to be liable under this Lease
with the same force and effect as though no assignment or sublease had been
made. If Lessee requests Lessor to consent to any assignment or sublease, Lessee
shall provide Lessor with the name, address, and a description of the business
of the proposed assignee or subtenant and its most recent financial statement
and such other evidence of financial responsibility as Lessor may request.
(c) Consent by Lessor to any assignment or subletting shall be consent only
as to that particular assignment and subletting, and not to any further
assignment or subletting. In the event Lessor consents to any assignment, both
Lessee and the assignee shall be primarily liable to Lessor hereunder.
(d) In the event any such proposed assignment or sublease provides for, or
Lessee otherwise receives, rent, additional rent, or other consideration in
excess of that provided for in this Lease, Lessee agrees that in the event
Lessor grants its consent, Lessee shall pay Lessor the amount of such excess as
it is received by, or becomes due to, Lessee. Any violation hereof shall be
deemed a material breach of this Lease, as well as an event of default
hereunder.
(e) In the event of any assignment or subletting, whether or not consented
to by Lessor, any ophons to renew this Lease or expand the premises shall
terminate without further action.
(f) Lessee shall submit any request for Lessor's consent to a sublease or
assignment in writing together with a non-refundable fee of $300.00 to cover
Lessor's consideration of the request.
15 RECAPTURE. (a) Within thirty (30) days after receiving Lessee's request
for Lessor's consent to an assignment of this Lease and the requisite
accompanying information, Lessor shall have the right to (i) grant its consent,
subject to such conditions as it may determine, (ii) withhold its consent, or
(iii) terminate this Lease, on a date reasonably determined by the Lessor, and
release Lessee from its future obligations hereunder.
(b) Within thirty (30) days after receiving Lessee's request for Lessor's
consent to a sublease of all or any portion of the premises and the requisite
accompanying information, Lessor shall have the right to (i) grant its consent,
subject to such conditions as it may determine, (ii) withhold its consent, or
(iii) elect to remove that portion of the premises
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proposed to be sublet from this Lease, on a date reasonably determined by
the Lessor, in which event this Lease shall be terminated and suspended as to
such proposed sublet space only and rent for the balance of the premises shall
be adjusted from the date of such suspension on the basis of the remaining
square feet compared to the total square feet in the premises prior to such
suspension, all as determined by Lessor.
16. HOLDING OVER. If Lessee shall remain in possession of the premises
after the expiration of the term of this Lease, then Lessee shall be a tenant
from month to month, and such tenancy shall otherwise be subject to all of the
terms, provisions, covenants, and agreements of this Lease, except that rent
shall be a rate equal to one hundred fifty percent (150%) of the Adjusted Annual
Rental due hereunder over the last twelve (12) months determined on a monthly
basis, and, if Lessor shall suffer any damage or loss as a result of such
holdover, such as losses or damages which may result from Lessor's inability to
timely deliver the premises to a subsequent tenant of the premises, Lessee shall
promptly pay the amount thereof to Lessor.
17. RIGHTS RESERVED BY LESSOR. Lessor reserves the following rights:
(a) to change the street address of the Building; the name of the Building;
the unit number of the premises; and the arrangement or location of entrances,
passageways, doors, doorways, corridors, elevators, stairs, toilets, or other
public parts of the Building without liability to Lessee;
(b) to designate all sources furnishing sign painting, lettering, vending
machines, towel or toilet supplies, or other similar services required in the
premises;
(c) to enter the premises during the last ninety (90) days of the term,
provided Lessee shall have removed substantially all of Lessee's property from
the premises, for the purpose of altering, remodeling, repairing, renovating, or
otherwise preparing the premises for tenanting to others;
(d) to grant anyone the exclusive privilege of conducting any particular
business or activity in the Building;
(e) to enter the premises at all reasonable times (1) for the making of
such inspections, repairs, alterations, improvements, or additions of, or to,
the premises or the Building as Lessor may deem necessary or desirable; (2) to
exhibit the premises to others, and (3) for any purpose whatsoever related to
the safety, protection, preservation, or improvement of the premises or of the
Building or of Lessor's interest therein;
(f) at any time or times, Lessor, either voluntarily or pursuant to
governmental requirement, may, at Lessor's expense, make repairs, alterations,
or improvements in or to the Building or any part thereof, and, during such
times, may temporarily close entrances, doors, corridors, elevators, or other
public facilities; and
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(g) to charge Lessee any additional expense (including overtime or premium
costs incurred by Lessor) in the event repairs, alterations, decorating, or
other work in the premises or the Building are, at Lessee's request, not made
during ordinary business hours.
Lessor may exercise all or any of the foregoing rights hereby reserved
without being deemed guilty of an eviction or disturbance of Lessee's use and
occupancy, without being liable in any manner to Lessee, and without elimination
or abatement of rent, or payment of other compensation, and such acts shall in
no way affect this Lease.
18. REMEDIES OF LESSOR. All rights and remedies of Lessor herein set forth
are in addition to any and all rights: and remedies which are or may be
available to Lessor at law or in equity.
(a) If Lessee shall fail to pay any rent reserved herein when due, or fails
to pay Lessor's charges for water, electrical, or other services within ten (10)
days after the rendition of a statement, or defaults in the prompt and full
performance of any of Lessee's covenants and agreements hereunder, or if the
leasehold interest of Lessee be levied upon, under execution or be attached, or
if Lessee makes an assignment for the benefit of creditors, or if a receiver be
appointed for any property of Lessee, or if Lessee abandons the premises, then,
and in any such event, Lessor may, if Lessor so elects, and with or without
notice of such election and with or without demand whatsoever, forthwith
terminates this Lease and the Lessee's right to possession of the premises, or
Lessor may, without terminating this Lease, terminate Lessee's right to
possession of the premises. Lessee hereby waives Lessee's right to trial by jury
in connection with any proceedings by Lessor to enforce any of its rights
against Lessee under this Lease, including, without limitation, any proceedings
to remove Lessee from the premises.
(b) Upon the filing of a petition by or against Lessee under the United
States Bankruptcy Code, (the "Code"), Lessee, as debtor and as debtor in
possession, and any trustee who may be appointed shall (i) timely perform each
and every obligation of Lessee under this Lease until such time as this Lease is
either rejected or assumed by order of the United States Bankruptcy Court; (ii)
pay monthly in advance on the first day of each month as reasonable compensation
for use and occupancy of the premises an amount equal to the Rent and other
charges otherwise due pursuant to this Lease; (iii) provide adequate assurance
of future performance under the Lease; (iv) reject or assume this Lease within
sixty (60) days of the filing of such petition under the Code, and (v) do all
other things of benefit to Lessor otherwise required or permitted under the
Code. Lessee, as debtor and as debtor in possession, and any trustee, shall be
deemed to have rejected this Lease in the event of the failure to comply with
any of the above. Included within and in addition to any other conditions or
obligations imposed upon Lessee or its successor in the event of assumption
and/or assignment is the prior written consent of any mortgagee to which this
Lease has been assigned as collateral security.
(c) Upon termination of this Lease, or upon the termination of Lessee's
right to possession without termination of the Lease, Lessee shall surrender
possession and vacate the
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premises immediately, and Lessor may enter into and repossess the premises
with or without process of law and remove all persons and property therefrom in
the same manner and with the same right as if this Lease had not been made, and
for the purpose of such entry and repossession, Lessee waives any notices
provided by law or otherwise to be given in connection therewith.
(d) If Lessee abandons the premises, or if Lessor elects to terminate
Lessee's right to possession only, without terminating the Lease as above
provided, Lessor may remove from the premises any and all property found therein
and such repossession shall not release Lessee from Lessee's obligation to pay
the rent reserved herein. After any such repossession by Lessor without
termination of the Lease, Lessor shall make reasonable efforts to relet the
premises, or any part thereof, as agent of Lessee to any person, firm, or
corporation and for such time and upon such terms as Lessor, in Lessor's sole
discretion, may determine. Lessor may make repairs, alterations, and additions
in and to the premises and redecorate the same to the extent deemed by Lessor
necessary or desirable, and Lessee shall, upon demand, pay the cost thereof,
together with Lessor's expense (including any broker's commission) of reletting.
If the rents collected by Lessor upon any such reletting are not sufficient to
pay monthly the full amount of all rent reserved herein, together with the costs
of such repairs, alterations, additions, redecorating, and expenses, Lessee
shall pay to Lessor the amount of each monthly deficiency upon demand.
(e) Any and all property which may be removed from the premises by Lessor
may be handled, removed, stored, or otherwise disposed of by Lessor at the risk
and expense of Lessee, and Lessor shall, in no event, be responsible for the
preservation or safekeeping thereof. Lessee shall pay to Lessor, upon demand,
any and all expenses incurred in such removal and all storage charges against
such property so long as the same shall be in Lessor's possession or under
Lessor's control. If any property shall remain in the premises or in the
possession of Lessor and shall not be removed by Lessee within a period of ten
(10) days from and after the time when the premises are either abandoned by
Lessee or repossessed by Lessor under the terms of this Lease, the properly
shall conclusively be deemed to have been forever abandoned by Lessee.
(f) Lessor and Lessee agree that all of the goods, chattels, trade
fixtures, and other personal property belonging to Lessee which are or may be
put into the premises during the term, whether exempt or not from sale under
execution or attachment, shall, at all times, be bound with a lien in favor of
Lessor, and shall be chargeable for all rents hereunder and for the fulfillment
of the other covenants and agreements of Lessee herein contained. In the event
that Lessee shall have abandoned the premises, or in the event of any default of
Lessee hereunder, Lessor shall have the right to sell all or any part of said
property at public or private sale, without giving notice to Lessee or any
notice of sale, all notices required by statute or otherwise being hereby
expressly waived, and to apply the proceeds of such sale, first to the payment
of all costs and expenses of conducting the same, or caring for or storing said
property; second, toward the payment of any indebtedness which may be or may
become due from Lessee to Lessor; and, third, to pay to Lessee, on demand, in
writing, any surplus remaining after all indebtedness of Lessee to Lessor has
been fully paid.
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(g) In addition to all other rights and remedies of Lessor hereunder, if
Lessee fails to timely perform any of its obligations hereunder, including,
without limitation, monetary obligations, and whether or not Lessor has
terminated this Lease or Lessee's right to possession of the premises, or
either, Lessor may elect to accelerate and make immediately due and payable all
of the rent, additional rent, adjusted rent and any other charges or fees which
are due or may become due hereunder for the remainder of the term of this Lease.
Lessee agrees that Lessor may file suit to recover any sums due under this Lease
from time to time and that no suit or recovery of any portion due Lessor
hereunder shall be any defense to any subsequent action brought for any amount
not theretofore reduced to judgment in favor of Lessor.
19. LOSS OR DAMAGE TO PROPERTY. (a) All personal property belonging to
Lessee or to any other person located in or about the premises or the Building
shall be there at the sole risk of Lessee or such other person, and neither
Lessor nor Lessor's Company or employees shall be liable for the theft or
misappropriation thereof, nor for any damage or injury thereto, nor for damage
or injury to Lessee, to other persons, or to property caused by water, snow,
frost, steam, heat, cold, dampness, falling plaster, sewers or sewerage, gas,
odors, noise, the bursting or leaking of pipes, plumbing, electrical wiring, and
equipment and fixtures of all kinds, or by any act or neglect of other tenants
or occupants of the Building, or of any other person, or caused in any manner
whatsoever, unless the same shall solely and proximately result from the
negligence of Lessor or Lessor's Company or employees. Lessee will protect,
indemnify, and save harmless Lessor or Lessor's Company or employees from all
losses, costs, or damages sustained by reason of any act or other occurrence
causing injury to any person or property due directly or indirectly to the use
of the premises or any part thereof by Lessee, except losses, costs, or damages
solely and proximately resulting from the negligence of Lessor or Lessor's
Company or employees.
(b) Lessee shall indemnify and save Lessor and mortgagees of the Building
harmless from and against any clean-up costs, remedial or restoration work,
claims, judgments, damages, penalties, fines, costs, liabilities or losses,
including, without limitation, diminution in value of the premises, damages for
the loss or restriction on use of space within the Building, damages due to
adverse impact on marketing of space in the Building, and attorneys',
consultants' and experts' fees, which arise during or after the term of this
Lease as a result of any hazardous or toxic substances being generated or
disposed of in or on, or brought to, the Building by Lessee or any other
occupant of the Premises.
20. INSURANCE. Lessee shall, during the term of this Lease and at Lessee's
own expense, carry comprehensive general liability insurance with a combined
single limit of at least One Million Dollars ($1,000,000) for all injuries to or
death of persons and loss of or damage to property in any one occurrence, and
insurance at no less than the replacement value of (i) all alterations,
additions and improvements Lessee may make to the premises, and (ii) all of the
personal property that Lessee brings within the premises. Such insurance policy
shall name Lessor, the Company and, if requested by Lessor, any mortgagee of
Lessor as additional insureds, and shall contain a provision requiring that
the policy shall not be modified,
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<PAGE>
cancelled, or terminated without at least thirty (30) days prior written
notice to Lessor and the Company, and, if requested by Lessor, any mortgagee of
Lessor. At least twenty (20) days prior to the time such insurance is first
required to be carried by Lessee and thereafter at least thirty (30) days prior
to the expiration of any such policy, Lessee shall deliver to Lessor a
certificate of insurance validly stamped by the issuing insurance carrier
evidencing both the payment of all premiums due thereon and the coverage
outlined above.
21. WAIVER OF SUBROGATION. In the event either party hereto requests a
waiver of subrogation with respect to the Building, premises, and property
therein or occurrences thereon, and if such waiver can be written without
additional premium, or with an additional premium if the party making the
request agrees to pay such additional premium for the other party, as well as
any additional premium for the requesting party's insurance, then there shall
exist mutual waivers of subrogation and each party hereto will waive any and
every claim which arises or may arise in its favor and against the other party
hereto, or anyone claiming through or under them, by way of subrogation or
otherwise, during the term of this Lease or any extension or renewal thereof for
any and all loss of, or damage to, any of its property (whether or not such loss
or damage is caused by the fault or negligence of the other party or anyone for
whom such other party may be responsible), which loss or damage is covered (or
required to be covered hereunder) by valid and collectible fire and extended
coverage insurance policies, to the extent that such loss or damage is recovered
or recoverable under insurance policies required to be carried hereunder or
insurance policies actually carried by the party, and further provided that the
aforesaid waiver shall not affect any "deductibles" on such policies. Such
waivers shall be in addition to, and not in limitation or derogation of, any
other waiver or release contained in this Lease with respect to any loss or
damage to property of the parties hereto. Each party hereto will then
immediately give to each insurance company which has issued to it policies of
fire and extended coverage insurance written notice of the terms of such mutual
waivers, and to have such insurance policies properly endorsed, if necessary, to
prevent the invalidation of such insurance coverages by reason of such waivers.
Upon request, each party shall provide the other party with confirmation from
its insurance company(ies) of compliance with the terms of this Paragraph.
22. UNTENANTABILITY. If the premises or the Building are made unfit for
occupancy by fire or other casualty, acts of God, or other cause, Lessor may
elect (a) to terminate this Lease as of the date when the premises or the
Building are so made unfit for occupancy, by written notice to Lessee within
ninety (90) days after that date, or (b) to repair, restore, or rehabilitate the
premises or the Building at Lessor's expense within one hundred eighty (180)
days after Lessor is enabled to take possession of all damaged areas and to
undertake reconstruction or repairs; and if Lessor elects so to repair, restore,
or rehabilitate the premises or the Building, this Lease shall not terminate,
but rent shall be abated on a per-diem basis to the extent and for the period
that the premises are unfit for occupancy. In the event Lessor shall proceed
under (b) above and shall not substantially complete the work within said one
hundred eighty (180) day period (excluding from said period loss of time
resulting from delays beyond the reasonable control of Lessor) either Lessor or
Lessee may then terminate this Lease, as of the last day of such one hundred
eighty (180) day period, by
15
<PAGE>
written notice to the other not later than ten (10) days after the
expiration of said one hundred eighty (180) day period, computed as herein
provided, and Lessor shall have no liability to Lessee for failure to restore,
repair, or rehabilitate the premises. In the event of termination of this Lease
pursuant to this Paragraph, rent shall be apportioned on a per-diem basis to and
including the effective date of such termination. Except as provided in this
Paragraph, neither party hereto shall have the right to terminate this Lease by
reason of damage to, or destruction of, the premises or the Building.
23. ESTOPPEL CERTIFICATE BY LESSEE. Lessee agrees that from time to time,
upon not less than ten (10) days' prior request by Lessor, Lessee will deliver
to Lessor (without cost or expense to Lessor or such other party designated by
Lessor) a statement, in writing, certifying (a) that this Lease is unmodified
and in full force and effect (or if there have been modifications, that the same
is in full force and effect as modified, and identifying the modifications), (b)
the dates to which the Rent and other charges have been paid, (c) that, so far
as the person making the certificate knows, Lessor is not in default under any
provision of this Lease, and, if Lessor is in default, specifying each such
default of which the person making the certificate may have knowledge, and (d)
such other information as is reasonably requested by Lessor, it being understood
that any such statement so delivered may be relied upon by any landlord under
any ground or underlying lease, or any prospective purchaser, mortgagee, or any
assignee of any mortgage on the Building.
24. SUBORDINATION OF LEASE. Lessor shall have the right at any time, and
from time to time, to place upon the Building and the land of which the premises
are a part, a mortgage or mortgages which, together with all renewals,
extensions, modifications, and replacements thereof, shall be wholly prior to
the rights of Lessee and this Lease. It is the intention of the parties that
such priority shall be established automatically and that no separate instrument
shall be required to effectuate such subordination of this Lease. Lessee will,
however, at any time and from time to time, upon request of Lessor, promptly
execute and deliver to Lessor, without expense to Lessor, any and all
instruments deemed by Lessor necessary or advisable to subject and subordinate
this Lease and all rights given Lessee hereunder to such mortgage or mortgages.
In the event any proceedings are brought for the foreclosure of any such
mortgage, Lessee covenants that it will, to the extent of the Lessor's interest
affected by such foreclosure, attorn to the purchaser upon any such foreclosure
sale and recognize such purchaser as Lessor under this Lease. Lessee agrees to
execute and delivery to Lessor, without expense to Lessor, at any time and from
time to time, upon the request of Lessor or of any such holder, any instrument
which, in the sole judgment of Lessor, may be necessary or appropriate in any
such foreclosure proceeding or otherwise to evidence such attornment. Lessee
hereby appoints Lessor and the holder of any such mortgage or either of them,
the attorney-in-fact irrevocably, of Lessee to execute and deliver for and on
behalf of Lessee any such instrument. Lessee further waives the provisions of
any statute or rule of law, now or hereafter in effect, which may give or
purport to give Lessee any right or election to terminate or otherwise adversely
affect this Lease and the obligation of Lessee hereunder in the event any such
foreclosure proceeding is brought, and agrees that this Lease shall not be
affected in any way whatsoever by any such foreclosure proceeding.
16
<PAGE>
25. EMINENT DOMAIN. Lessee agrees with Lessor that if the whole or any part
of the premises shall be appropriated, condemned, taken, or otherwise acquired
by any public or quasi-public authority under power of eminent domain,
condemnation, or other proceedings, this Lease and the estate hereby created
shall terminate and wholly expire on the date legal title shall vest in the
appropriator or condemnor, and all rent shall be prorated and adjusted as of
that date. In no event whatsoever shall Lessee have any claim against Lessor by
reason of any appropriation, condemnation, or taking of the whole or any part of
the premises or of the Building, nor shall Lessee have any claim to the amount,
or any portion thereof, that may be awarded as compensation or as damages or
paid as a result of such appropriation and taking; provided, however, that
Lessee shall have the right, to the extent the same does not reduce Lessor's
award of compensation and damages, to bring a separate action against the
condemning authority (but not against Lessor) for the recovery of Lessee's
moving expenses, displacement expenses, loss of business, and damage to Lessee's
personal property which is removable hereunder.
26. NO WAIVER. (a) No receipt of money by Lessor from Lessee with knowledge
of default or breach of any covenants of this Lease, or after the termination of
any suit, or after final judgment for possession of the premises, shall be
deemed a waiver of such default or breach, nor shall it reinstate, continue, or
extend the term of this Lease or effect any such notice, demand, or suit.
(b) No delay on the part of Lessor in exercising any right, power, or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power, or privilege preclude any other, or
further, exercise thereof or the exercise of any other right, power, or
privilege.
(c) No act done or thing said by Lessor or Lessor's Company or employees
shall constitute a cancellation, termination, or modification of this Lease, or
a waiver of any covenant, agreement, or condition hereof, nor relieve Lessee
from Lessee's obligation to pay the rents reserved herein. Any waiver or release
by Lessor and any cancellation, termination, or modification of this Lease must
be in writing signed by Lessor.
27. EXPENSES OF ENFORCEMENT. Lessee shall pay, upon demand, all of Lessor's
costs, charges and expenses, including, without limitation, attorneys' fees and
out-of-pocket expenses of counsel, Company and others retained by Lessor
incurred in enforcing Lessee's obligations hereunder or incurred by Lessor in
any litigation, negotiation or transaction in which Lessee causes Lessor to
become involved or concerned.
QUIET ENJOYMENT. If Lessee shall (1) pay all rent reserved and all charges
for services stipulated herein to be paid by Lessee to Lessor, and (2) well and
faithfully keep, perform, and observe all of the covenants, agreements, and
conditions herein stipulated to be kept, performed, and observed by Lessee,
Lessee shall, at all times during the term of this
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<PAGE>
Lease, have peaceable and quiet enjoyment of the premises without hindrance
of Lessor or any person lawfully claiming under Lessor, subject, however, to the
terms of this Lease and to any underlying lease or to any mortgage to which this
Lease is or has become subordinate.
29. NOTICES. In every instance where it shall be necessary or desirable for
Lessor to serve any notice or demand upon Lessee, such notice or demand shall be
deemed sufficiently given or made if, in writing, it is mailed to Lessee by
registered or certified United States mail, postage prepaid, addressed to Lessee
at the Building of which the premises are a part, or at such alternative address
as may be set forth at the end of this paragraph, and the time of giving or
making such notice or demand shall be deemed to be the time when the same was
mailed as herein provided. Any notice by Lessee to Lessor must be sent by
registered or certified United States mail, postage prepaid, addressed to Lessor
in care of:
Sun Life Assurance Co. of Canada
c/o Ostendorf-Morris Company
The Diamond Building
1100 Superior Avenue
Cleveland, OH 44114
or at such other place as Lessor or the Company may, from time to time,
designate in writing. Wherever in this Lease, in connection with the breach,
default, or performance of any of the terms, provisions, covenants, and
agreements of Lessee, no period of time or notice is required by the terms
hereof, no notice shall be required as a prerequisite to the exercise of any
right or remedy of Lessor.
ALTERNATIVE ADDRESS FOR LESSEE:
72 East Drive, P.O. 500
Congress Lake
Hartville, OH 44632
Phone # 330-877-2398
30. RULES AND REGULATIONS. Lessee and Lessee's agents, employees, and
invitees shall faithfully observe, and strictly comply with, the Rules and
Regulations appearing at the end of this Lease and made a part hereof, and with
such further reasonable Rules and Regulations as Lessor may, notice to Lessee,
from time to time adopt and promulgate. Nothing in this Lease contained shall be
construed to impose upon Lessor any duty or obligation to enforce the Rules and
Regulations (as distinguished from the covenants and agreements) in any other
lease as against any other lessee, and Lessor shall not be liable to Lessee for
violation of the same by any other lessee or the Company, employees, or invitees
of such other lessee.
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31. REPRESENTATIVE CAPACITY. In the absence of fraud, no person, firm, or
corporation, or the heirs, personal representatives, successors and assigns,
respectively, thereof, signing this Lease as Company, administrator, executor,
trustee, or in any other representative capacity, shall ever be deemed or held
individually liable hereunder for any reason or cause whatsoever.
32. OFFER BY COMPANY. This Lease is offered to Lessee by the Company solely
in the capacity of a broker and is subject to Lessor's acceptance, and Lessee
has executed this Lease upon the understanding that this Lease shall not in any
way bind Lessor until such time as it has been accepted and signed by Lessor and
an executed counterpart delivered to Lessee.
33. BROKER. Lessee represents and warrants to Lessor, and Lessor represents
and warrants to Lessee that, other than the Company, no broker negotiated or was
instrumental in negotiating or consummating this Lease. Lessor agrees to pay
all fees and commissions, if any, which may become due to Company by reason of
this Lease and renewals or expansions thereof. Lessor and Lessee agree to
indemnify and hold the other harmless from all damages, liability and expenses,
including, without limitation, expenses and reasonable attorneys, fees, arising
from any claims or demands of any broker or finder for any commission or fee
alleged to be due based upon the conduct or action on said indemnifying party.
34. RECORDING. This Lease shall not be filed for record or recorded. If
Lessee shall so request, Lessor shall provide Lessee with a Memorandum of Lease
satisfying all applicable statutory requirements which Lessee may then file for
record and have recorded.
35. PARTIES BOUND. The covenants, agreements, and conditions contained in
this Lease shall bind and inure to the benefit of Lessor and Lessee and their
respective heirs, legal representatives, successors and assigns, subject,
however, to the provisions hereof requiring the consent of Lessor to any
assignment of this Lease or subletting of the premises.
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37. APPLICATION OF PAYMENTS. Lessor shall have the right to apply payments
received from Lessee pursuant to this Lease (regardless of Lessee's designation
of such payments) to satisfy any obligations of Lessee hereunder, in such order
and amounts as Lessor, in its sole discretion, may elect.
38. LIMITATION ON LESSOR'S LIABILITY. It is expressly understood and agreed
by Lessee that none of Lessor's covenants, undertakings, or agreements are made
or intended as personal covenants, undertakings or agreements by Lessor, and any
liability for damage or breach or nonperformance by Lessor shall be collectible
only out of Lessor's interest in the Building, and no personal liability its
assumed by, nor at any time may be asserted against, Lessor or any of its
officers, Company, employees, legal representatives, successors or assigns, all
such liability, if any, being expressly waived and released by Lessee. Lessee
acknowledges that Lessor has the right to transfer its interest in the land and
Building and in this Lease, and Lessee agrees that in the event of any such
transfer, Lessor shall automatically be released from all liability under this
Lease and Lessee agrees to look solely to such transferee for the performance of
Lessor's obligations hereunder.
39. HEADINGS. The captions of paragraphs and subparagraphs are for
convenience only and shall not be deemed to limit, construe, affect, or alter
the meaning of such paragraphs or subparagraphs.
40. ENTIRE AGREEMENT. This Lease, together with the rider attached hereto,
contains the entire agreement of the parties hereto as to the subject matter
hereof, and there are no agreements, promises, covenants, warranties, or
representations other than as set forth herein. The rider attached hereto, and
which is made a part hereof, is particularly identified as Rider Number 1, and
consists of 4 page(s). Exhibits lettered A and B are also attached hereto and
made a part hereof.
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IN WITNESS WHEREOF, Lessor and Lessee have respectively signed triplicate
counterparts of this First Lease Amendment as of day, month, and year first
above written.
Signed and acknowledged LESSOR
in the presence of:
Sun Life Assurance Company
of Canada
/s/ KIMBERLY A. MARCHETTI /s/ GEORGE M. COLLINS
- - ---------------------------------- --------------------------------
/s/ KIMBERLY A. MARCHETTI For President
- - ----------------------------------
Printed Name
/s/ JOYCE T. BOWEN /s/ THOMAS V. PEDULLA
- ----------------------------------- --------------------------------
Joyce T. Bowen For Secretary
- -----------------------------------
Printed Name
LESSEE
Duncan Hill Co., Ltd.
/s/ WILLIAM L. MILLER /s/ ILLEGIBLE
- ----------------------------------- ----------------------------------
President
- -----------------------------------
Printed Name
/s/ JEANNE E. MILLER /s/ ILLEGIBLE
- ----------------------------------- ----------------------------------
Vice President
- -----------------------------------
Printed Name
WITNESSES:
/s/ JOYCE L. DUNCAN
- ------------------------
Joyce L. Duncan
/s/ ILLEGIBLE
- ------------------------
Illegible
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<PAGE>
ACKNOWLEDGMENT FOR LESSEE
CORPORATE
- ---------
STATE OF OHIO )
) SS:
COUNTY OF STARK )
BEFORE ME, a Notary Public in and for said County and State, personally
appeared the above-named Duncan Hill Co., Ltd., by William Miller, its President
and by Jeanne Miller, its Vice President, who acknowledged that they did sign
the foregoing instrument and that the same is the free authorized act and deed
of the corporation and their free act and deed personally and as officers of the
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal at Canton, Ohio, this 13 day of September, 1996.
/s/ JOYCE L. DUNCAN
--------------------------
Notary Public
(Notarial Seal)
My commission expires ______________
JOYCE L. DUNCAN
Notary Public, State of Ohio
My Commission Expires
May 5, 1999
<PAGE>
ACKNOWLEDGMENT FOR LESSOR
CORPORATE
- ---------
STATE OF MASSACHUSETTS
Commonwealth of Massachusetts )
County of Norfolk ) SS
On this 23rd day of September 1996 before me appeared George M. Collins and
Thomas V. Pedulla both to me known to be acting for the President and Secretary
respectively of the Sun Life Assurance Company of Canada, the corporation that
executed the annexed instrument, and acknowledged the said instrument to be the
free and voluntary act and deed of said corporation, for the uses and purposes
therein mentioned, and on oath stated that they were authorized to execute said
instrument, and that the seal affixed is the corporate seal of said corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year first above written.
/s/ KIMBERLY A. MARCHETTI
-----------------------------------------
Notary Public Kimberly A. Marchetti
Notary Public
My Commission Expires: JUNE 15, 2001
------------------
_________________________________________
Notary Public
(Notarial Seal)
My commission expires ___________________
<PAGE>
RULES AND REGULATIONS
Wherever in these Rules and Regulations the word "Lessee" is used, it shall
be taken to apply to and include the Lessee and his agents, employees, invitees,
licensees, subtenants, and contractors, and is to be deemed of such number and
gender as the circumstances require. The word "Lessor" shall be taken to include
the employees and agents of Lessor.
WINDOWS AND PROJECTIONS. Nothing shall be affixed to or projected beyond
the outside of the Building by Lessee without the prior written consent of
Lessor. If Lessee desires, and Lessor permits, blinds, shades, awnings, or other
form of window covering, ventilating equipment, or similar devices, they shall
be furnished and installed at the expense of Lessee and must be of such shape,
color, material, and make as are approved by Lessor. Lessee shall not place or
permit to be placed any article of any kind on the window ledges, and shall not
throw or drop, or permit to be thrown or dropped, any article from any window of
the Building.
ADVERTISING AND SIGNS. Unless expressly permitted by Lessor, no sign,
advertisement, notice, or other lettering shall be inscribed, painted, or
affixed on any part of the outside or inside of the Building, or otherwise
exhibited so as to be visible from outside the premises, except on the doors of
the leased premises, and then only of subject matter and in such color, size,
style, and material as shall conform to the specifications of Lessor. Lessor
reserves the right to remove all other signs or lettering, without notice to
Lessee, at the expense of Lessee. Any newspaper, magazine, or other advertising
done from the premises, or referring to the premises or the Building, which, in
the opinion of Lessor, is objectionable, shall be immediately discontinued upon
notice from Lessor.
BICYCLES AND ANIMALS. Unless expressly permitted by Lessor, no bicycle or
other vehicle, and no fish, bird, or animal shall be brought or permitted to be
in the Building or any part thereof.
CLOSING AND LOCKING DOORS AND WINDOWS. Unless expressly permitted by
Lessor, all doors to the premises are to be kept closed at all times except when
in actual use for entrance to or exit from the premises. Lessee shall be
responsible for the locking of doors and the closing of windows in and to the
premises. Lessee shall be responsible for any damage or loss resulting from
violation of this rule.
MACHINERY. Unless Lessor gives prior written consent in each and every
instance, Lessee shall not install or operate any steam or internal combustion
engine, boiler, machinery, refrigerating or heating device or air-conditioning
apparatus in or about the premises, or carry on any mechanical business therein.
All equipment of any electrical or mechanical nature shall be placed in settings
which absorb and prevent vibration, noise, or annoyance, or the spillage or
leakage of fluids, oils, or grease on the floors of the leased premises.
<PAGE>
USE. Lessee shall not illegally sell or store therein any spirituous, malt,
or vinous Iiquors, or any narcotic drugs; shall not exhibit, sell, or offer for
sale on the premises or in the Building anything whatsoever except such as are
essentially connected with the stated use of the premises.
FURNITURE OR EQUIPMENT REMOVAL. Moving or delivery of furniture, trade
fixtures and equipment, and freight by or for Lessee shall be done at such times
and in such manner as may be required by Lessor. Lessee shall list with Lessor
any and all furniture, trade fixtures and equipment, and similar articles to be
removed from the Building, and the list must be approved at the office of the
Building before Building employees will permit any article to be removed. Lessor
reserves the right, but shall not be obligated, to inspect all articles being
moved in or out of the Building; and Lessor shall not be liable to Lessee or to
any other person for loss of, or damage to, any furniture, trade fixtures and
equipment, or other personal property from any cause.
UNSIGHTLY PLACEMENT OF EQUIPMENT. Unless expressly permitted by Lessor,
Lessee shall not place or allow anything to be against or near exterior windows,
the glass or corridor partitions, or doors of the premises which may diminish
the light in, or be unsightly, from halls, corridors, or the exterior of the
Building.
LOCKS. Unless expressly permitted by Lessor, no additional locks or similar
devices shall be attached to any door, and no keys other than those provided by
Lessor shall be made for any door. If more than two keys for one lock are
desired by Lessee, Lessor shall provide the same upon payment therefor by
Lessee; Lessee shall obtain keys from Lessor only and from no other source. Upon
termination of this Lease or of Lessee's possession, Lessee shall surrender all
keys to the premises and shall provide Lessor with the then-current combinations
for any combination locks or safes, cabinets, and vaults.
NOISES AND OTHER NUISANCES. Lessee shall not make or permit any noise or
odor that is objectionable to Lessor or to other occupants of the Building to
emanate from the premises, and shall not create or maintain a nuisance therein,
and shall not disturb, solicit, or canvass any occupant of the Building, and
shall not do any act tending to injure the reputation of the Building. Lessee
shall not install or operate any phonograph, musical instrument, radio or
television receiver or similar device in the Building without prior approval of
Lessor. The use thereof, if permitted, shall be subject to control by Lessor to
the end that others shall not be disturbed or annoyed.
SAFES OR HEAVY ARTICLES. Lessee shall not overload any floor or otherwise
impair the structural integrity of the Building. Lessor may, but shall not be
required to, direct the routing, time of movement, and placement of safes and
other heavy articles. Safes, furniture, and all large articles shall be brought
into the premises or removed therefrom at the Lessee's sole risk and
responsibility. Any damage done to the Building by reason of a safe or other
heavy article of Lessee being brought into, stored in, or removed from the
premises shall be repaired at Lessee's sole expense.
2
<PAGE>
SOLICITORS. Lessor reserves the right, but shall not be held obligated, to
exclude or eject from the Building any or all solicitors, canvassers or
peddlers, and any persons conducting themselves in such manner as, in the sole
judgment of Lessor, constitutes an annoyance to any of the tenants of the
Building or an interference with Lessor's operation of the Building, or who are
otherwise undesirable.
FLAMMABLE MATERIALS. No article of an extra hazardous nature and no
explosive shall be brought into the premises or into the Building. The storage
and use of all flammable and volatile materials and substances necessary in
Lessee's business operations shall be in conformity with applicable laws, rules,
and regulations of all duly-constituted public authorities.
LODGING. The premises hereby leased shall not be used for lodging or
sleeping purposes, and no cooking of food shall be done therein.
ADDITIONAL RULES. Lessor reserves the right to make such other and further
Rules and Regulations as in Lessor's judgment may, from time to time, be needful
or desirable for the safety, care, cleanliness, and efficient operation of the
Building, and for the preservation of good order therein.
3
<PAGE>
RIDER NUMBER ONE
THIS RIDER NUMBER ONE, COMPRISING PARAGRAPH 41 to 48, INCLUSIVE, IS ANNEXED TO
AND FORMS A PART OF THE LEASE AGREEMENT DATED AS OF THE _________ DAY OF
______________________ BETWEEN SUN LIFE OF CANADA, AS LESSOR, AND DUNCAN HILL
GROUP, LTD AS LESSEE, COVERING SUITE 406 OF THE BELDEN VILLAGE TOWER, 4450
BELDEN VILLAGE STREET, N.W., CANTON, OH 44718.
- --------------------------------------------------------------------------------
41. ANNUAL BASE RENT FOR SUITE 406:
a) Beginning October 1, 1996, Lessee shall pay to Lessor as rent for the
premises for year one the annual sum of Sixty Four Thousand Seven Hundred
Eighty Five and no/100 dollars ($64,785.00) payable in monthly installments
of Five Thousand Three Hundred Ninety Eight and 75/100 dollars ($5,398.75);
b) Beginning October 1, 1997, Lessee shall pay to Lessor as rent for the
premises for year two the annual sum of Sixty Seven Thousand Eight Hundred
Seventy and no/100 dollars ($67,870.00) payable in monthly installments of
Five Thousand Six Hundred Fifty Five and 83/100 dollars($5,655.83);
42. ANNUAL BASE RENT FOR SUITE 4408:
a) Beginning November 1, 1996, Lessee shall pay to Lessor as rent for the
premises for year one the annual sum of Nine Thousand Six Hundred and no/100
dollars ($9,600.00) payable in monthly installments of Eight Hundred and
nol100 dollars ($800.00).
b) Beginning October 1, 1997, Lessee shall pay to Lessor as rent for the
premises for year two the annual sum of Nine Thousand Six Hundred and no/100
dollars ($9,600.00) payable in monthly installments of Eight Hundred and
no/100 dollars ($800.00).
43. SPACE PREPARATION - SUITE 406: Lessor, at Lessor's sole expense, shall
provide the following improvements to suite 406:
a) Replace brown cove base with gray cove base.
b) Paint entire suite with color selected by Lessee from building standard
selection.
c) Clean carpet in entire suite and repair "rolls", if possible, in three (3)
offices.
d) Replace damaged, bowed, missing or stained ceiling tile.
e) Provide door hardware and doors where missing.
f) Install electrical wall plates where missing.
g) Open three (3) offices into one (1) conference area in suite 407. Install two
(2) doors and frames into suite 406 and install demising wall separating the
conference area from the balance of suite
1
<PAGE>
407. Paint conference room, install new carpeting selection from building
standard selection book.
h) Complete construction of public corridor.
i) Lessor shall, at its expense, install ceiling terminations where missing.
j) Lessor shall relocate one (1) HVAC vent in reception area.
k) Lessor shall repair wall at window million in one office.
l) Lessor shall finish construction and level unfinished floor in the old suite
#409.
Lessee acknowledges that some of the above items will be completed after Lessee
has taken occupancy and will cooperate with Lessor and Lessor's contractors in
order to complete said improvements.
44. SPACE PREPARATION - SUITE 4408 (First Floor Retail): Lessee is responsible
for suite construction and all Jackson Twp. and Stark County permits and
drawings. Lessor to approve final working drawings prior to commencement of
construction. Lessor, at Lessor's sole expense, shall sprinkle the entire space
and construct a wall to demise said premises. Lessor, at Lessor's sole expense
shall install a corridor wall from Lessee's space to rear existing entrance
door. Lessee and Lessee's architect and contractors will cooperate with Lessor
and Lessor's architect and contractors in scheduling Lessee's construction, to
allow for installation of fire suppression system and demising walls.
45. SUITE 4408 UTILITIES: Lessee shall pay to Lessor a seventy five percent
(75%) proration of the utilities for Suite 4408 (on a monthly basis) including
electric, gas, water and sewer.
46. RIGHT OF FIRST OFFER: Lessee shall have the right of first offer on vacant
contiguous fourth floor office space.
47. MAINTENANCE OF SUITE 4408 BY LESSEE: Lessor shall be under no obligation to
make repairs, alterations, or improvements in or to the premises except those
herein specifically agreed to be made or performed by Lessor.
All of the obligations of Lessee under this Paragraph 47 are in addition to
those obligations of Lessee set forth in Paragraph 10 or elsewhere in this
Lease.
Lessee, at Lessee's expense, shall keep and maintain the interior (including,
without limitation, the electrical; lighting, plumbing, heating, and any
air-conditioning or ventilating systems serving the premises, and any
installations made by Lessee which serve the premises, but which extend from
other portions of the Building, all door and window hardware and glass) of the
premises in good order, condition and repair.
In furtherance of, and not in limitation of, Lessee's obligation to keep and
maintain the premises in good order, condition and repair, Lessee agrees with
the Lessor that Lessee, at Lessee's expense:
a. will arrange for and provide all janitor, porter or cleaning
(including, without limitation, cleaning of interior windows and door
glass cleaning, all on a schedule reasonably satisfactory to the
Lessor) services necessary for the premises;
2
<PAGE>
b. will keep the premises in a clean, slightly and sanitary condition,
complying with all applicable requirements of Jackson Twp. and/or
Stark County, Ohio, and through Lessee's own employees or by means of
a competent exterminating service, free from vermin and rodents;
c. will keep open and clean all grease traps and all sewer and/or
discharge lines from the premises to the building primary sewer lines;
d. will permit Lessor, Lessor's Agent, contractors and employees access
to the premises at all reasonable times for the making of inspections,
repairs for which Lessor is responsible under this lease, alteration,
or improvements or additions of, or to, the Building or the premises;
e. will receive those shipments of food merchandise and any other items
being delivered through the Building's rear receiving area.
Lessee shall permit no waste, damage, or injury to the premises, not do, or
permit to be done, on the premises any act or thing which will invalidate or be
in conflict with any fire insurance policies or increase the rate for insurance
covering the Building, or which shall, or might, subject Lessor to any liability
or responsibility for injury to any person or persons, or to property, by reason
of any business or operation being carried on by Lessee in the premises.
48. EXTENSION PRIVILEGE OF LESSEE: Provided that Lessee is not then in default
under this Lease Agreement, Lessor hereby grants to Lessee the privilege of
extending, subject to the provisions of this paragraph, the term of this Lease
Agreement for two periods of one (1) year each, commencing on the first day
following the Lease Termination Date and ending twelve (12) months thereafter
(which said one {1} year period is hereinafter called "said extended term"),
for, upon and under all of the covenants, (excepting those relating to the
amount of Annual Base Rent to be paid by Lessee), agreements and conditions in
this Lease contained; and the amount of Annual Base Rent be paid by Lessee
during said extended terms shall be determined in accordance with the provisions
of subparagraphs (c) and (d) below:
a. Lessee shall exercise the extension privilege granted by subparagraph
(a) above by giving to Lessor not later than six (6) months prior to
the Lease Termination Date written notice of Lessee's election so to
extend the term of the Lease.
b. If Lessee does not notify Lessor, in accordance with subparagraph (a)
above, then Lessor shall be under no obligation to negotiate with
Lessee with respect to said extension, and Lessor, without liability
to Lessee, may lease said premises to any person, firm or corporation
for a term to commence after the Lease Termination Date. Furthermore,
Lessor shall be under no obligation, as outlined in Paragraph 17e
above, to provide Lessee prior notice for the purposes of showing or
exhibiting said space to prospects.
3
<PAGE>
c. During the first extended term for suite 406, Lessee shall pay to
lessor the annual sum of Seventy One Thousand Three Hundred Eighty and
50/100 dollars ($71,380.50) per year payable in equal monthly
installments of Five Thousand Nine Hundred Forty Eight and 38/100
dollars ($5,948.38).
During the first extended term for suite 4408, Lessee shall pay to
Lessor the annual sum of Nine Thousand Six Hundred and no/100 Dollars
($9,600.00), payable in equal monthly installments of Eight Hundred
and no/100 dollars ($800.00).
d. During the second extended term for suite 406, Lessee shall pay to
Lessor the annual sum of Seventy Four Thousand Four Hundred Eighty
Four and no/lO0 dollars ($74,040.00) payable in equal monthly
installments of Six Thousand Two Hundred seven and no/100 dollars
($6,170.00).
During the second extended term for suite 4408, Lessee shall pay to
Lessor the annual sum of Nine Thousand Six Hundred and no/100 dollars
($9,600.00), payable in equal monthly installments of Eight Hundred
and no/100 dollars ($800.00).
4
<PAGE>
NOTICE TO PROSPECTIVE REAL ESTATE PURCHASERS/TENANTS
In Ohio, real estate licensees are required to disclose which party they
represent in a real estate transaction. Under Ohio law, a real estate licensee
is considered to be an agent of the owner of real estate unless there is an
agreement to the contrary and that agreement is disclosed to all parties.
Some of the duties of the licensee, as the agent of the owner, are to:
Treat all parties to a transaction honestly `
Offer the property without regard to race, color, religion, sex, ancestry,
national origin or handicap
Promote the best interest of the owner
Obtain the best price for the owner
Fully disclose to the owner all facts which might affect or influence a
decision
Present all offers to the owner
As a buyer, if you choose to have a real estate broker represent you as your
agent, you should enter into a written contract that clearly establishes the
obligations of both you and your agent and specifies how your agent will be
compensated.
Under Ohio law, the disclosure statement below must be submitted to the
prospective purchaser/tenant in each transaction. This form has been approved by
the Ohio Real Estate Commission for use by Ohio real estate licensees. Please
sign below.
- --------------------------------------------------------------------------------
AGENCY DISCL0SURE STATEMENT
The listing broker and all agents associated with the listing broker
represent the owner.
The T.K. HARRIS COMMERCIAL REAL ESTATE and JERRY BLAKE represent (please
(Selling Broker) (Selling Agent)
(check one): the purchaser/tenant [X] ; the owner[ ].
If a broker/agent is representing both the purchaser/tenant and the owner as
a dual agent, he/she must attach a copy of the agreement signed by the
purchaser/tenant and owner acknowledging their agreement to this arrangement.
By signing below, the parties confirm that they have received, read and
understood the information in this Agency Disclosure Form and that this form
was provided to them before signing a contract to purchase/lease real estate.
/s/ ILLEGIBLE 9/9/96 /s/ ILLEGIBLE 9/23/96
------------------------------------ ------------------------------------
Purchaser/Tenant Date Owner Date
<PAGE>
/s/ ILLEGIBLE 9/9/96
------------------------------------ ------------------------------------
Purchaser/Tenant Date Owner Date
- --------------------------------------------------------------------------------
Any questions regarding the role or responsibilities of real estate brokers or
agents in Ohio can be directed to an attorney or to:
STATE OF OHIO
DEPARTMENT OF COMMERCE
DIVISION OF REAL ESTATE
Telephone: 614/466-4100
<PAGE>
EXHIBIT 10.4
Retail Store
Smoke Shop
FIRST AMENDMENT OF LEASE
This First Amendment of Lease Agreement entered into as of the ______
day of _________, 1997, between Sun Life Assurance Co. of Canada (hereinafter
called "Lessor") and Duncan Hill Co., LTD., a corporation (hereinafter called
"Lessee
WITNESSETH
Whereas, (A) by Lease agreement dated September 23, 1996 (hereinafter
called "said Lease"), Suite 4408 consisting of approximately 1,200 rentable
square feet (hereinafter called "Demised Premises"), located in Belden Village
Tower, 4450 Belden Village Street, N.W., Canton, Ohio (hereinafter called "the
Building") was leased to Lessee for a term expiring September 30, 1998 and (b)
Lessor and Lessee now desire to modify and amend said Lease.
Now, therefore, in consideration of the mutual covenants, conditions and
agreements hereinafter contained, said Lease is amended as follows, effective
October 1, 1997.
1. Term. The term of this Agreement is hereby extended for an additional
period of three (3) years, beginning October l, 1998 and ending September 30,
2001.
2. Demised Premises. The demised premises shall be expanded from
approximately 1,200 rentable square feet to approximately 1,577 rentable square
feet. Lessor shall construct a partition wall and one (1) door and frame for
the expanded area of the leased premises on or about November 1, 1997, subject
to the approval by the Stark County Building Department.
3. Annual Base Rent. Beginning November 1, 1997, or at such time as
the Lessor completes its obligations in item 2 above, Lessee shall pay Lessor as
base rent for the Premises the annual sum of Twelve Thousand Six Hundred Six
Hundred Sixteen and No/100 Dollars ($12,616.00) payable in equal monthly
installments of One Thousand Fifty One and 33/100 Dollars ($1,051.33) payable in
advance, without deduction or set-off, in legal tender of the United States of
America, on the first day of each and every calendar month of the term, at the
offices of Ostendorf-Morris Company (hereinafter called the "Company"), The
Diamond Building, 1100 Superior Avenue, Cleveland, Ohio 44114, or at such other
place as Lessor may, from time to time, in writing, designate. Any rent or
other
<PAGE>
sums payable by Lessee to Lessor under this Lease which are not paid within
five (5) days after they first become due, will be subject to a late charge
of five percent (5%) of the amount due. Such late charges will be due and
payable as additional rent on or befor the next day on which an installment
of rent is due. Any rent, late charges or other sums payable by Lessee to
Lessor under this Lease which are not paid when due will bear interest at a
rate equal to eighteen percent (18%) per annum, such interest to commence on
the date that said payment was first due and payable, or, at the Lessor's
election, if a late charge is assessed, fifteen (15) days after the date said
payment was first due and payable. Such interest will be due and payable as
additional rent on or before the next installment of rent and will accrue
until paid from the date thereof.
4. Extension Privilege of Lessee. Paragraph 48 of the original lease,
Extension Privilege of Lessee, pertaining to suite 4408 only, is hereby
deleted. Lessees extension privileges for Suite 406 shall remain.
5. Other. Lessee hereby agrees to complete the installation of the
ceiling in the original leased premises, in exchange for a one (1) time
rental credit of One Thousand Six Hundred and No/100 Dollars ($1,600.00).
All other terms and conditions of said Lease remain in full force and
effect.
IN WITNESS WHEREOR, Lessor and Lessee have respectively signed
triplicate counterparts of this First Amendment of Lease as of the day,
month, and year first above written.
<TABLE>
<S> <C>
Signed and acknowledged LESSOR
in the presence of:
Sun Life Assurance Co. of Canada
- -------------------------------- ---------------------------------
Signature
By For President
- -------------------------------- ----------------
Print Name
And by For Secretary
- -------------------------------- ------------
Signature
- --------------------------------
Print Name
LESSEE
------
Duncan Hill Co., LTD.
- -------------------------------- --------------------------------------
Signature
By
- -------------------------------- ----------------------------------
Print Name William L. Miller, President
And by
- -------------------------------- -------------------------------
Signature Jeanne E. Miller, Vice President
- --------------------------------
Print Name
</TABLE>
2
<PAGE>
ACKNOWLEDGMENT FOR LESSOR
STATE OF MASSACHUSETTS)
)
COUNTY OF NORFOLK ) SS.:
On this___________________ day of ____________________________ ,
1997, before me appeared ________________________________________________,
to me known to be acting for the President and Secretary respectively of the
Sun Life Assurance Company of Canada, the corporation that executed the
annexed instrument, and acknowledged the said instrument to be the free and
voluntary act and deed of said corporation, for the uses and purposes therein
mentioned, and on oath stated that they were authorized to execute said
instrument, and that the seal affixed is the corporate seal of said
corporation.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year first above written.
-------------------------------------------
Notary Public
(Notarial Seal)
My commission expires
---------------------
ACKNOWLEDGMENT FOR LESSEE
STATE OF OHIO )
COUNTY OF STARK) SS.:
On this 22nd day of September, 1997, before me appeared William L.
Miller, President and Jeanne E. Miller, Vice President, of Duncan Hill Co.,
LTD. the individuals who executed the annexed instrument, and acknowledged
the said instrument to be their free and voluntary act and deed, for the uses
and purposes therein mentioned, and on oath stated that they were authorized
to execute said instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year first above written.
-------------------------------------------
Notary Public
(Notarial Seal)
My commission expires
----------------------
3
<PAGE>
Exhibit 10.5
<TABLE>
<CAPTION>
NOTICE OF FINAL AGREEMENT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I009616 1465 LED [ILLEGIBLE]
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C> <C>
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
BY SIGNING THIS DOCUMENT EACH PARTY REPRESENTS AND AGREES THAT: (A) THE WRITTEN
LOAN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES, (B) THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES, AND (C) THE WRITTEN LOAN
AGREEMENT MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OR UNDERSTANDINGS OF THE PARTIES.
AS USED IN THIS NOTICE, THE FOLLOWING TERMS HAVE THE FOLLOWING MEANINGS:
LOAN. The term "Loan" means the following described loan: a Variable Rate
(1.000% over UNITED NATIONAL BANK BASE LENDING RATE. The Base Rate will be
determined by the Loan Committee and then reported to the Executive
Committee. The Base Rate will be established upon consideration of the
following factors: (1) The prime or base rate of money bank centers in
Cleveland, Pittsburgh and New York. (2) Competitive conditions for the
commercial loan market in the Bank's lending area. (3) The Bank's money
position and cost of funds. The Loan Committee shall periodically review
the Base Rate and make adjustments as needed reflecting the fluctuation in
the prime rate and pressures in the market. Debtor will then be notified
each time Bank changes the Base Rate., with an interest rate ceiling of
25.000%, making an initial rate of 9.250%), Nondisclosable Revolving Line
of Credit Loan to a Corporation for $800,000.00 due on demand.
PARTIES. The term "Parties" means UNITED NATIONAL BANK & TRUST CO. and any
and all entities or individuals who are obligated to repay the loan or have
pledged property as security for the Loan, including without limitation the
following:
BORROWER: Kids Stuff, Inc.
GUARANTOR #1: William L. Miller
GUARANTOR #2: E.A. Carey of Ohio, Inc.
GUARANTOR #3: Duncan Hill Co., LTD
LOAN AGREEMENT. The term "Loan Agreement" means one or more promises,
promissory notes, agreements, undertakings, security agreements, deeds of
trust or other documents, or commitments, or any combination of those
actions or documents, relating to the Loan, including without limitation
the following:
NECESSARY FORMS
Corporate Resolution to Borrow Corporate Resolution to Guarantee
Promissory Note / Change In Terms Agr. Commercial Guaranty
Commercial Guaranty - Entity Guarantors Security Agreement
UCC - 1 Agreement to Provide Insurance
Disbursement Request and Authorization Notice of Final Agreement
*Application
OPTIONAL FORMS
Notice of Insurance Requirements
================================================================================
EACH PARTY WHO SIGNS BELOW, OTHER THAN UNITED NATIONAL BANK & TRUST CO.,
ACKNOWLEDGES, REPRESENTS, AND WARRANTS TO UNITED NATIONAL BANK & TRUST CO. THAT
IT HAS RECEIVED, READ AND UNDERSTOOD THIS NOTICE OF FINAL AGREEMENT. THIS NOTICE
IS DATED DECEMBER 31, 1996.
BORROWER:
KIDS STUFF, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
---------------------------- ---------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
GUARANTOR:
X /s/ WILLIAM L. MILLER
----------------------------
WILLIAM L. MILLER
<PAGE>
GUARANTOR:
E.A. CAREY OF OHIO, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
---------------------------- --------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, VICE PRESIDENT
GUARANTOR:
DUNCAN HILL CO., LTD
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
--------------------------- ---------------------------------
WILLAM L. MILLER, PRESIDENT JEANNE E. MILLER, VICE PRESIDENT
LENDER:
UNITED NATIONAL BANK & TRUST CO.
BY: [ILLEGIBLE]
------------------------------------------
AUTHORIZED OFFICER
Leo E. Doyle, Sr. Vice Pres. Exec. Officer
<PAGE>
UNITED BANK
UNITED NATIONAL BANK & TRUST CO.
PROMISSORY NOTE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C> <C>
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
<TABLE>
======================================================================================================
<S> <C> <C>
PRINCIPAL AMOUNT: $800,000.00 INITIAL RATE: 9.250% DATE OF NOTE: DECEMBER 31, 1996
</TABLE>
PROMISE TO PAY. KIDS STUFF, INC. ("BORROWER") PROMISES TO PAY TO UNITED NATIONAL
BANK & TRUST CO. ("LENDER"), OR ORDER, IN LAWFUL MONEY OF THE UNITED STATES OF
AMERICA, ON DEMAND, THE PRINCIPAL AMOUNT OF EIGHT HUNDRED THOUSAND & 00/100
DOLLARS ($800,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST
ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE. THE
INTEREST RATE WILL NOT INCREASE ABOVE 25.000%.
PAYMENT. BORROWER WILL PAY THIS LOAN IMMEDIATELY UPON LENDER'S DEMAND. IN
ADDITION, BORROWER WILL PAY REGULAR MONTHLY PAYMENTS OF ALL ACCRUED UNPAID
INTEREST DUE AS OF EACH PAYMENT DATE, BEGINNING JANUARY 30, 1997, WITH ALL
SUBSEQUENT INTEREST PAYMENTS TO BE DUE ON THE SAME DAY OF EACH MONTH AFTER THAT.
Interest on this Note is computed on a 365/360 simple interest basis; that is,
by applying the ratio of the annual interest rate over a year of 360 days,
multiplied by the outstanding principal balance, multiplied by the actual number
of days the principal balance is outstanding. Borrower will pay Lender at
Lender's address shown above or at such other place as Lender may designate in
writing. Unless otherwise agreed or required by applicable law, payments will be
applied first to any unpaid collection costs and any late charges, then to any
unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Note is subject to change from
time to time based on changes in an index which is the UNITED NATIONAL BANK BASE
LENDING RATE. The Base Rate will be determined by the Loan Committee and then
reported to the Executive Committee. The Base Rate will be established upon
consideration of the following factors: (1) The prime or base rate of money bank
centers in Cleveland, Pittsburgh and New York. (2) Competitive conditions for
the commercial loan market in the Bank's lending area. (3) The Bank's money
position and cost of funds. The Loan Committee shall periodically review the
Base Rate and make adjustments as needed reflecting the fluctuation in the prime
rate and pressures in the market. Debtor will then be notified each time Bank
changes the Base Rate. (the "Index"). The Index is not necessarily the lowest
rate charged by Lender on its loans and is set by Lender in its sole discretion.
If the Index becomes unavailable during the term of this loan, Lender may
designate a substitute index after notifying Borrower. Lender will tell Borrower
the current Index rate upon Borrower's request. Borrower understands that Lender
may make loans based on other rates as well. The interest rate change will not
occur more often than each day. THE INDEX CURRENTLY IS 8.250% PER ANNUM. THE
INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF THIS NOTE WILL BE
AT A RATE OF 1.000 PERCENTAGE POINT OVER THE INDEX, ADJUSTED IF NECESSARY FOR
THE MAXIMUM RATE LIMITATION DESCRIBED BELOW, RESULTING IN AN INITIAL RATE OF
9.250% PER ANNUM. NOTWITHSTANDING ANY OTHER PROVISION OF THIS NOTE, THE VARIABLE
INTEREST RATE OR RATES PROVIDED FOR IN THIS NOTE WILL BE SUBJECT TO THE
FOLLOWING MAXIMUM RATE. NOTICE: Under no circumstances will the interest rate on
this Note be more than (except for any higher default rate shown below) the
lesser of 25.000% per annum or the maximum rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of
this Note, Borrower understands that Lender is entitled to a MINIMUM INTEREST
CHARGE OF $75.00. Other than Borrower's obligation to pay any minimum interest
charge, Borrower may pay without penalty all or a portion of the amount owed
earlier than it is due. Early payments will not, unless agreed to by Lender in
writing, relieve Borrower of Borrower's obligation to continue to make payments
of accrued unpaid interest. Rather, they will reduce the principal balance due.
<PAGE>
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this Note or
any agreement related to this Note, or in any other agreement or loan Borrower
has with Lender. (c) Any representation or statement made or furnished to Lender
by Borrower or on Borrower's behalf is false or misleading in any material
respect either now or at the time made or furnished. (d) Borrower becomes
insolvent, a receiver is appointed for any part of Borrower's property, Borrower
makes an assignment for the benefit of creditors, or any proceeding is commenced
either by Borrower or against Borrower under any bankruptcy or insolvency laws.
(e) Any creditor tries to take any of Borrower's property on or in which Lender
has a lien or security interest. This includes a garnishment of any of
Borrower's accounts with Lender. (f) Any guarantor dies or any of the other
events described in this default section occurs with respect to any guarantor of
this Note. (g) A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired. (h) Lender in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Note within
the preceding twelve (12) months, it may be cured (and no event of default will
have occurred) if Borrower, after receiving written notice from Lender demanding
cure of such default: (a) cures the default within fifteen (15) days; or (b) if
the cure requires more than fifteen (15) days, immediately initiates steps which
Lender deems in Lender's sole discretion to be sufficient to cure the default
and thereafter continues and completes all reasonable and necessary steps
sufficient to produce compliance as soon as reasonably practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Note and all accrued unpaid interest immediately due, without
notice, and then Borrower will pay that amount. Upon default, including failure
to pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Note to 6.000
percentage points over the Index. The interest rate will not exceed the maximum
rate permitted by applicable law. Lender may hire or pay someone else to help
collect this Note if Borrower does not pay. Borrower also will pay Lender that
amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. If not
prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS NOTE HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OF OHIO. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF STARK COUNTY, THE STATE OF OHIO. LENDER AND BORROWER HEREBY WAIVE THE
RIGHT TO ANY JURY TRIAL IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM BROUGHT BY
EITHER LENDER OR BORROWER AGAINST THE OTHER. THIS NOTE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OHIO.
CONFESSION OF JUDGMENT. Borrower hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Borrower for the unpaid amount of this
Note as evidenced by an affidavit signed by an officer of Lender setting forth
the amount then due, plus attorneys' fees as provided in this Note, plus costs
of suit, and to release all errors, and waive all rights of appeal. If a copy of
this Note, verified by an affidavit, shall have been filed in the proceeding, it
will not be necessary to file the original as a warrant of attorney. Borrower
waives the right to any stay of execution and the benefit of all exemption laws
now or hereafter in effect. No single exercise of the foregoing warrant and
power to confess judgment will be deemed to exhaust the power, whether or not
any such exercise shall be held by any court to be invalid, voidable, or void;
but the power will continue undiminished and may be exercised from time to time
as Lender may elect until all amounts owing on this Note have been paid in full.
Borrower waives any conflict of interest that an attorney hired by Lender may
have in acting on behalf of Borrower in confessing judgment against Borrower
while such attorney is retained by Lender. Borrower expressly consents to such
attorney acting for Borrower in confessing judgment.
DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $21.00 if Borrower
makes a payment on Borrower's loan and the check or preauthorized charge with
which Borrower pays is later dishonored.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Note against any and
all such accounts.
<PAGE>
COLLATERAL. This Note is secured by Blanket lien on all business assets
including but limited to the customer mailing list including all additions and
substitutions thereto.
LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under
this Note may be requested either orally or in writing by Borrower or by an
authorized person. Lender may, but need not, require that all oral requests be
confirmed in writing. All communications, instructions, or directions by
telephone or otherwise to Lender are to be directed to Lender's office shown
above. The following party or parties are authorized to request advances under
the line of credit until Lender receives from Borrower at Lender's address shown
above written notice of revocation of their authority: WILLIAM L. MILLER,
PRESIDENT; AND JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT. Borrower agrees to be
liable for all sums either: (a) advanced in accordance with the instructions of
an authorized person or (b) credited to any of Borrower's accounts with Lender.
The unpaid principal balance owing on this Note at any time may be evidenced by
endorsements on this Note or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Note if: (a) Borrower or any guarantor is in default under the terms of this
Note
<PAGE>
12-31-1996 PROMISSORY NOTE PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
or any agreement that Borrower or any guarantor has with Lender, including any
agreement made in connection with the signing of this Note; (b) Borrower or any
guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims
or otherwise attempts to limit, modify or revoke such guarantor's guarantee of
this Note or any other loan with Lender; (d) Borrower has applied funds provided
pursuant to this Note for purposes other than those authorized by Lender; or (e)
Lender in good faith deems itself insecure under this Note or any other
agreement between Lender and Borrower.
GENERAL PROVISIONS. This Note is payable on demand. The inclusion of specific
default provisions or rights of Lender shall not preclude Lender's right to
declare payment of this Note on its demand. If any part of this Note cannot be
enforced, this fact will not affect the rest of the Note. In particular, this
section means (among other things) that Borrower does not agree or intend to
pay, and Lender does not agree or intend to contract for, charge, collect, take,
reserve or receive (collectively referred to herein as "charge or collect"), any
amount in the nature of interest or in the nature of a fee for this loan, which
would in any way or event (including demand, prepayment, or acceleration) cause
Lender to charge or collect more for this loan than the maximum Lender would be
permitted to charge or collect by federal law or the law of the State of Ohio
(as applicable). Any such excess interest or unauthorized fee shall, instead of
anything stated to the contrary, be applied first to reduce the principal
balance of this loan, and when the principal has been paid in full, be refunded
to Borrower. Lender may delay or forgo enforcing any of its rights or remedies
under this Note without losing them. Borrower and any other person who signs,
guarantees or endorses this Note, to the extent allowed by law, waive
presentment, demand for payment, protest and notice of dishonor. Upon any change
in the terms of this Note, and unless otherwise expressly stated in writing, no
party who signs this Note, whether as maker, guarantor, accommodation maker or
endorser, shall be released from liability. All such parties agree that Lender
may renew or extend (repeatedly and for any length of time) this loan, or
release any party or guarantor or collateral; or impair, fail to realize upon or
perfect Lender's security interest in the collateral; and take any other action
deemed necessary by Lender without the consent of or notice to anyone. All such
parties also agree that Lender may modify this loan without the consent of or
notice to anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF
THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO
THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE BORROWER AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
BORROWER:
KIDS STUFF, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
---------------------------- ------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
<PAGE>
<TABLE>
<CAPTION>
UNITED BANK
UNITED NATIONAL BANK & TRUST CO.
DISBURSEMENT REQUEST AND AUTHORIZATION
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C> <C>
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
LOAN TYPE. This is a Variable Rate (1.000% over UNITED NATIONAL BANK BASE
LENDING RATE. The Base Rate will be determined by the Loan Committee and then
reported to the Executive Committee. The Base Rate will be established upon
consideration of the following factors: (1) The prime or base rate of money bank
centers in Cleveland, Pittsburgh and New York. (2) Competitive conditions for
the commercial loan market in the Bank's lending area. (3) The Bank's money
position and cost of funds. The Loan Committee shall periodically review the
Base Rate and make adjustments as needed reflecting the fluctuation in the prime
rate and pressures in the market. Debtor will then be notified each time Bank
changes the Base Rate, with an interest rate ceiling of 25.000%, making an
initial rate of 9.250%), Revolving Line of Credit Loan to a Corporation for
$800,000.00 due on demand.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
[X] BUSINESS (INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: Working Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $800,000.00 as follows:
UNDISBURSED FUNDS: $800,000.00
--------------
NOTE PRINCIPAL: $800,000.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED DECEMBER 31, 1996.
BORROWER:
KIDS STUFF, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
---------------------------- ------------------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL GUARANTY
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
1465 LED
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C> <C> <C>
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
GUARANTOR: DUNCAN HILL CO., LTD
7245 WHIPPLE AVE., N.W.
NORTH CANTON, OH 44720
</TABLE>
================================================================================
AMOUNT OF GUARANTY. THE AMOUNT OF THIS GUARANTY IS EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($800,000.00).
GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, DUNCAN HILL CO., LTD
("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO
UNITED NATIONAL BANK & TRUST CO. ("LENDER") OR ITS ORDER, ON DEMAND, IN LEGAL
TENDER OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS
DEFINED BELOW) OF KIDS STUFF, INC. ("BORROWER") TO LENDER ON THE TERMS AND
CONDITIONS SET FORTH IN THIS GUARANTY.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means Kids Stuff, Inc..
GUARANTOR. The word "Guarantor" means Duncan Hill Co., LTD.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated December 31, 1996.
INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) all
principal, (b) all interest, (c) all late charges, (d) all loan fees and
loan charges, and (e) all collection costs and expenses relating to the
Note or to any collateral for the Note. Collection costs and expenses
include without limitation all of Lender's attorneys' fees and Lender's
legal expenses, whether or not suit is instituted, and attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services.
LENDER. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
NOTE. The word "Note" means the promissory note or credit agreement dated
December 31, 1996, IN THE ORIGINAL PRINCIPAL AMOUNT OF $800,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for
the promissory note or agreement. NOTICE TO GUARANTOR: THE NOTE EVIDENCES A
REVOLVING LINE OF CREDIT FROM LENDER TO BORROWER.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL
NOT EXCEED AT ANY ONE TIME $ 800,000.00 PLUS ALL COSTS AND EXPENSES OF (A)
ENFORCEMENT OF THIS GUARANTY AND (B) COLLECTION AND SALE OF ANY COLLATERAL
SECURING THIS GUARANTY.
The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided below
to the contrary) affect or invalidate any such other guaranties. The liability
of Guarantor will be the aggregate liability of Guarantor under the terms of
this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance
and prompt payment when due, whether at maturity or earlier by reason of
acceleration or otherwise, of all Indebtedness within the limits set forth in
the preceding section of this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE OF
CREDIT AND GUARANTOR UNDERSTANDS AND AGREES THAT THIS GUARANTEE SHALL BE OPEN
AND CONTINUOUS UNTIL THE LINE OF CREDIT IS TERMINATED AND THE INDEBTEDNESS IS
PAID IN FULL, AS PROVIDED BELOW.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness shall have
been fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. Release of any other
guarantor or termination of any other guaranty of the Indebtedness shall not
affect the liability of Guarantor under this Guaranty. A revocation received by
Lender from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE
OF CREDIT AND IT IS SPECIFICALLY ANTICIPATED THAT FLUCTUATIONS WILL OCCUR IN THE
AGGREGATE AMOUNT OF INDEBTEDNESS OWING FROM BORROWER TO LENDER. GRANTOR
SPECIFICALLY ACKNOWLEDGES AND AGREES THAT FLUCTUATIONS IN THE AMOUNT OF
INDEBTEDNESS, EVEN TO ZERO DOLLARS ($0.00), SHALL NOT CONSTITUTE A TERMINATION
OF THIS GUARANTY. GUARANTOR'S LIABILITY UNDER THIS GUARANTY SHALL TERMINATE ONLY
UPON (A) TERMINATION IN WRITING BY BORROWER AND LENDER OF THE LINE OF CREDIT,
(B) PAYMENT OF THE INDEBTEDNESS IN FULL IN LEGAL TENDER, AND (C) PAYMENT IN FULL
IN LEGAL TENDER OF ALL OTHER OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTY.
GUARANTOR'S AUTHORIZATION TO LENDER. GUARANTOR AUTHORIZES LENDER, WITHOUT NOTICE
OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM
TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED OR UNSECURED LOANS TO
BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR OTHERWISE TO EXTEND
ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE, RENEW, EXTEND,
ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR PAYMENT OR OTHER
TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS, INCLUDING INCREASES
AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS; EXTENSIONS MAY BE
REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM; (C) TO TAKE AND HOLD
SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS, AND EXCHANGE,
ENFORCE, WAIVE, SUBORDINATE, FAIL OR DECIDE NOT TO PERFECT, AND RELEASE ANY SUCH
SECURITY, WITH OR WITHOUT THE SUBSTITUTION OF NEW COLLATERAL; (D) TO RELEASE,
SUBSTITUTE, AGREE NOT TO SUE, OR DEAL WITH ANY ONE OR MORE OF BORROWER'S
SURETIES, ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OR IN ANY MANNER LENDER
MAY CHOOSE; (E) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF PAYMENTS AND
CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (F) TO APPLY SUCH SECURITY AND DIRECT
THE ORDER OR MANNER OF SALE THEREOF, INCLUDING WITHOUT LIMITATION, ANY
NONJUDICIAL SALE PERMITTED BY THE TERMS OF THE CONTROLLING SECURITY AGREEMENT OR
DEED OF TRUST, AS LENDER IN ITS DISCRETION MAY DETERMINE; (G) TO SELL, TRANSFER,
ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR ANY PART OF THE INDEBTEDNESS; AND (H)
TO ASSIGN OR TRANSFER THIS GUARANTY IN WHOLE OR IN PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of this Guaranty do not conflict with or result in
a default under any agreement or other instrument binding upon Guarantor and do
not result in a violation of any law, regulation, court decree or order
applicable to Guarantor; (e) Guarantor has not and will not, without the prior
written consent of Lender, sell, lease, assign, encumber, hypothecate, transfer,
or otherwise dispose of all or substantially all of Guarantor's assets, or any
interest therein; (f) upon Lender's request, Guarantor will provide to Lender
financial and credit information in form acceptable to Lender, and all such
financial information which currently has been, and all future financial
information which will be provided to Lender is and will be true and correct in
all material respects and fairly present the financial condition of Guarantor as
of the dates the financial information is provided; (g) no material adverse
change has occurred in Guarantor's financial condition since the dale of the
most recent financial statements provided to Lender and no event has occurred
which may materially adversely affect Guarantor's financial condition; (h) no
litigation, claim, investigation, administrative proceeding or similar action
(including those for unpaid taxes) against Guarantor is pending or threatened;
(i) Lender has made no representation to Guarantor as to the creditworthiness of
Borrower; and (j) Guarantor has established adequate means of obtaining from
Borrower on a continuing basis information regarding Borrower's financial
condition. Guarantor agrees to keep adequately informed from such means of any
facts, events, or circumstances which might in any way affect Guarantor's risks
under this Guaranty, and Guarantor further agrees that, absent a request for
information, Lender shall have no obligation to disclose to Guarantor any
information or documents acquired by Lender in the course of its relationship
with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
<PAGE>
12-31-1996 COMMERCIAL GUARANTY PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations, or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.
CONFESSION OF JUDGMENT. Guarantor hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Guarantor for the unpaid amount of
this Guaranty as evidenced by an affidavit signed by an officer of Lender
setting forth the amount then due, plus attorneys' fees as provided in this
Guaranty, plus costs of suit, and to release all errors, and waive all rights of
appeal. If a copy of this Guaranty, verified by an affidavit, shall have been
filed in the proceeding, it will not be necessary to file the original as a
warrant of attorney. Guarantor waives the right to any stay of execution and
the benefit of all exemption laws now or hereafter in effect. No single exercise
of the foregoing warrant and power to confess judgment will be deemed to exhaust
the power, whether or not any such exercise shall be held by any court to be
invalid, voidable, or void; but the power will continue undiminished and may be
exercised from time to time as Lender may elect until all amounts owing on this
Guaranty have been paid in full. Guarantor waives any conflict of interest that
an attorney hired by Lender may have in acting on behalf of Guarantor in
confessing judgment against Guarantor while such attorney is retained by Lender.
Guarantor expressly consents to such attorney acting for Guarantor in confessing
judgment.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Guarantor agrees upon
Lender's request to submit to the jurisdiction of the courts of STARK
County, State of Ohio. Lender and Guarantor hereby waive the right to any
jury trial in any action, proceeding, or counterclaim brought by either
Lender or Guarantor against the other. This Guaranty shall be governed by
and construed in accordance with the laws of the State of Ohio.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees
as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile, and
shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier, or when deposited in the United
States mail, first class postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above or to such other
addresses as either party may designate to the other in writing. If there
is more than one Guarantor, notice to any Guarantor will constitute notice
to all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor", "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of Borrower
or Guarantor are corporations or partnerships, it is not necessary for
Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
<PAGE>
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Guaranty. No prior waiver by Lender, nor any
course of dealing between Lender and Guarantor, shall constitute a waiver
of any of Lender's rights or of any of Guarantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
<PAGE>
12-31-1996 COMMERCIAL GUARANTY PAGE 3
Loan No R-I001185 (CONTINUED)
================================================================================
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED DECEMBER 31,1996.
GUARANTOR:
BY: /s/ WILLIAM L. MILLER
---------------------------------
WILLIAM L. MILLER, PRESIDENT
BY: /s/ JEANNE E. MILLER
---------------------------------
JEANNE E. MILLER, VICE PRESIDENT
SIGNED, ACKNOWLEDGED DELIVERED IN THE PRESENCE OF:
X -----------------------------------
WITNESS
X -----------------------------------
WITNESS
================================================================================
<PAGE>
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
1465 LED
</TABLE>
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
<TABLE>
<S> <C> <C>
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
GUARANTY: E.A. CAREY OF OHIO, INC.
7245 WHIPPLE AVE., N.W.
NORTH CANTON, OH 44720
</TABLE>
================================================================================
AMOUNT OF GUARANTY. THE AMOUNT OF THIS GUARANTY IS EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($800,000.00).
GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, E.A. CAREY OF OHIO, INC.
("GUARANTOR") ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO
UNITED NATIONAL BANK & TRUST CO. ("LENDER") OR ITS ORDER, ON DEMAND, IN LEGAL
TENDER OF THE UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS
DEFINED BELOW) OF KIDS STUFF, INC. ("BORROWER") TO LENDER ON THE TERMS AND
CONDITIONS SET FORTH IN THIS GUARANTY.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means Kids Stuff, Inc.
GUARANTOR. The word "Guarantor" means E. A. Carey of Ohio, Inc.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated December 31, 1996.
INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) all
principal, (b) all interest, (c) all late charges, (d) all loan fees and
loan charges, and (e) all collection costs and expenses relating to the
Note or to any collateral for the Note. Collection costs and expenses
include without limitation all of Lender's attorneys' fees and Lender's
legal expenses, whether or not suit is instituted, and attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services.
Lender. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
Note. The word "Note" means the promissory note or credit agreement dated
December 31, 1996, IN THE ORIGINAL PRINCIPAL AMOUNT of $800,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for
the promissory note or agreement. NOTICE TO GUARANTOR: THE NOTE EVIDENCES A
REVOLVING LINE OF CREDIT FROM LENDER TO BORROWER.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL
NOT EXCEED AT ANY ONE TIME $800,000.00 PLUS ALL COSTS AND EXPENSES OF (A)
ENFORCEMENT OF THIS GUARANTY AND (B) COLLECTION AND SALE OF ANY COLLATERAL
SECURING THIS GUARANTY.
The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided below
to the contrary) affect or invalidate any such other guaranties. The liability
of Guarantor will be the aggregate liability of Guarantor under the terms of
this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance
and prompt payment when due, whether at maturity or earlier by reason of
acceleration or otherwise, of all Indebtedness within the limits set forth in
the preceding section of this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE OF
CREDIT AND GUARANTOR UNDERSTANDS AND AGREES THAT THIS GUARANTEE SHALL BE OPEN
AND CONTINUOUS UNTIL THE LINE OF CREDIT IS TERMINATED AND THE INDEBTEDNESS IS
PAID IN FULL, AS PROVIDED BELOW.
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness shall have
been fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. Release of any other
guarantor or termination of any other guaranty of the Indebtedness shall not
affect the liability of Guarantor under this Guaranty. A revocation received by
Lender from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE
OF CREDIT AND IT IS SPECIFICALLY ANTICIPATED THAT FLUCTUATIONS WILL OCCUR IN THE
AGGREGATE AMOUNT OF INDEBTEDNESS OWING FROM BORROWER TO LENDER. GRANTOR
SPECIFICALLY ACKNOWLEDGES AND AGREES THAT FLUCTUATION IN THE AMOUNT OF
INDEBTEDNESS, EVEN TO ZERO DOLLARS ($ 0.00), SHALL NOT CONSTITUTE A TERMINATION
OF THIS GUARANTY. GUARANTOR'S LIABILITY UNDER THIS GUARANTY SHALL TERMINATE ONLY
UPON (A) TERMINATION IN WRITING BY BORROWER AND LENDER OF THE LINE OF CREDIT,
(B) PAYMENT OF THE INDEBTEDNESS IN FULL IN LEGAL TENDER, AND (C) PAYMENT IN FULL
IN LEGAL TENDER OF ALL OTHER OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTY.
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, WITHOUT NOTICE
OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM
TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED OR UNSECURED LOANS TO
BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR OTHERWISE TO EXTEND
ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE, RENEW, EXTEND,
ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR PAYMENT OR OTHER
TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS, INCLUDING INCREASES
AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS, EXTENSIONS MAY BE
REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM; (C) TO TAKE AND HOLD
SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS, AND EXCHANGE,
ENFORCE, WAIVE, SUBORDINATE, FAIL OR DECIDE NOT TO PERFECT, AND RELEASE ANY SUCH
SECURITY, WITH OR WITHOUT THE SUBSTITUTION OF NEW COLLATERAL; (D) TO RELEASE,
SUBSTITUTE, AGREE NOT TO SUE, OR DEAL WITH ANY ONE OR MORE OF BORROWER'S
SURETIES, ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OR IN ANY MANNER LENDER
MAY CHOOSE; (E) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF PAYMENTS AND
CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (F) TO APPLY SUCH SECURITY AND DIRECT
THE ORDER OR MANNER OF SALE THEREOF, INCLUDING WITHOUT LIMITATION, ANY
NONJUDICIAL SALE PERMITTED BY THE TERMS OF THE CONTROLLING SECURITY AGREEMENT OR
DEED OF TRUST, AS LENDER IN ITS DISCRETION MAY DETERMINE; (G) TO SELL, TRANSFER,
ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR ANY PART OF THE INDEBTEDNESS; AND (H)
TO ASSIGN OR TRANSFER THIS GUARANTY IN WHOLE OR IN PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of
<PAGE>
12-31-1996 COMMERCIAL GUARANTY Page 2
Loan No R-I001185 (Continued)
================================================================================
this Guaranty do not conflict with or result in a default under any agreement or
other instrument binding upon Guarantor and do not result in a violation of any
law, regulation, court decree or order applicable to Guarantor; (e) Guarantor
has not and will not, without the prior written consent of Lender, sell, lease,
assign, encumber, hypothecate, transfer, or otherwise dispose of all or
substantially all of Guarantor's assets, or any interest therein, (f) upon
Lender's request, Guarantor will provide to Lender financial and credit
information in form acceptable to Lender, and all such financial information
which currently has been, and all future financial information which will be
provided to Lender is and will be true and correct in all material respects and
fairly present the financial condition of Guarantor as of the dates the
financial information is provided; (g) no material adverse change has occurred
in Guarantor's financial condition since the date of the most recent financial
statements provided to Lender and no event has occurred which may materially
adversely affect Guarantor's financial condition; (h) no litigation, claim,
investigation, administrative proceeding or similar action (including those for
unpaid taxes) against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (j)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.
GUARANTOR'S WAIVERS, Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale; (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of Borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.
CONFESSION OF JUDGMENT. Guarantor hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Guarantor for the unpaid amount of
this Guaranty as evidenced by an affidavit signed by an officer of Lender
setting forth the amount then due, plus attorneys' fees as provided in this
Guaranty, plus costs of suit, and to release all errors, and waive all rights of
appeal. If a copy of this Guaranty, verified by an affidavit, shall have been
filed in the proceeding, it will not be necessary to file the original as a
warrant of attorney. Guarantor waives the right to any stay of execution and the
benefit of all exemption laws now or hereafter in effect.
<PAGE>
12-31-1996 COMMERCIAL GUARANTY PAGE 3
LOAN NO R-I001185 (CONTINUED)
================================================================================
No single exercise of the foregoing warrant and power to confess judgment will
be deemed to exhaust the power, whether or not any such exercise shall be held
by any court to be invalid, voidable, or void; but the power will continue
undiminished and may be exercised from time to time as Lender may elect until
all amounts owing on this Guaranty have been paid in full. Guarantor waives any
conflict of interest that an attorney hired by Lender may have in acting on
behalf of Guarantor in confessing judgment against Guarantor while such attorney
is retained by Lender. Guarantor expressly consents to such attorney acting for
Guarantor in confessing judgment.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Guarantor agrees upon
Lender's request to submit to the jurisdiction of the courts of STARK
County, State of Ohio. Lender and Guarantor hereby waive the right to any
jury trial in any action, proceeding, or counterclaim brought by either
Lender or Guarantor against the other. This Guaranty shall be governed by
and construed in accordance with the laws of the State of Ohio.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees
as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile, and
shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier, or when deposited in the United
States mail, first class postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above or to such other
addresses as either party may designate to the other in writing. If there
is more than one Guarantor, notice to any Guarantor will constitute notice
to all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of Borrower
or Guarantor are corporations or partnerships, it is not necessary for
Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Guaranty. No prior waiver by Lender, nor any
course of dealing between Lender and Guarantor, shall constitute a waiver
of any of Lender's rights or of any of Guarantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
<PAGE>
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED DECEMBER 31, 1996.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE, GUARANTOR AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
GUARANTOR:
E.A. CAREY OF OHIO, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
------------------------------- --------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, VICE PRESIDENT
<PAGE>
COMMERCIAL GUARANTY
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
GUARANTOR: WILLIAM L. MILLER
P.O. BOX 500
HARTVILLE, OH 44632-0500
</TABLE>
================================================================================
AMOUNT OF GUARANTY. THE AMOUNT OF THIS GUARANTY IS EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($800,000.00).
GUARANTY. FOR GOOD AND VALUABLE CONSIDERATION, WILLIAM L. MILLER ("GUARANTOR")
ABSOLUTELY AND UNCONDITIONALLY GUARANTEES AND PROMISES TO PAY TO UNITED NATIONAL
BANK & TRUST CO. ("LENDER") OR ITS ORDER, ON DEMAND, IN LEGAL TENDER OF THE
UNITED STATES OF AMERICA, THE INDEBTEDNESS (AS THAT TERM IS DEFINED BELOW) OF
KIDS STUFF, INC. ("BORROWER") TO LENDER ON THE TERMS AND CONDITIONS SET FORTH IN
THIS GUARANTY.
DEFINITIONS. The following words shall have the following meanings when used in
this Guaranty:
BORROWER. The word "Borrower" means Kids Stuff, Inc.
GUARANTOR. The word "Guarantor" means William L. Miller.
GUARANTY. The word "Guaranty" means this Guaranty made by Guarantor for the
benefit of Lender dated December 31, 1996.
INDEBTEDNESS. The word "Indebtedness" means the Note, including (a) all
principal, (b) all interest, (c) all late charges, (d) all loan fees and
loan charges, and (e) all collection costs and expenses relating to the
Note or to any collateral for the Note. Collection costs and expenses
include without limitation all of Lender's attorneys' fees and Lender's
legal expenses, whether or not suit is instituted, and attorneys' fees and
legal expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated
post-judgment collection services.
LENDER. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
NOTE. The word "Note" means the promissory note or credit agreement dated
December 31, 1996, IN THE ORIGINAL PRINCIPAL AMOUNT OF $800,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions for
the promissory note or agreement. NOTICE TO GUARANTOR: THE NOTE EVIDENCES A
REVOLVING LINE OF CREDIT FROM LENDER TO BORROWER.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
MAXIMUM LIABILITY. THE MAXIMUM LIABILITY OF GUARANTOR UNDER THIS GUARANTY SHALL
NOT EXCEED AT ANY ONE TIME $800,000.00 PLUS ALL COSTS AND EXPENSES OF (A)
ENFORCEMENT OF THIS GUARANTY AND (B) COLLECTION AND SALE OF ANY COLLATERAL
SECURING THIS GUARANTY.
The above limitation on liability is not a restriction on the amount of the
Indebtedness of Borrower to Lender either in the aggregate or at any one time.
If Lender presently holds one or more guaranties, or hereafter receives
additional guaranties from Guarantor, the rights of Lender under all guaranties
shall be cumulative. This Guaranty shall not (unless specifically provided below
to the contrary) affect or invalidate any such other guaranties. The liability
of Guarantor will be the aggregate liability of Guarantor under the terms of
this Guaranty and any such other unterminated guaranties.
NATURE OF GUARANTY. Guarantor intends to guarantee at all times the performance
and prompt payment when due, whether at maturity or earlier by reason of
acceleration or otherwise, of all Indebtedness within the limits set forth in
the preceding section of this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE OF
CREDIT AND GUARANTOR UNDERSTANDS AND AGREES THAT THIS GUARANTEE SHALL BE OPEN
AND CONTINUOUS UNTIL THE LINE OF CREDIT IS TERMINATED AND THE INDEBTEDNESS IS
PAID IN FULL, AS PROVIDED BELOW.
<PAGE>
DURATION OF GUARANTY. This Guaranty will take effect when received by Lender
without the necessity of any acceptance by Lender, or any notice to Guarantor or
to Borrower, and will continue in full force until all Indebtedness shall have
been fully and finally paid and satisfied and all other obligations of Guarantor
under this Guaranty shall have been performed in full. Release of any other
guarantor or termination of any other guaranty of the Indebtedness shall not
affect the liability of Guarantor under this Guaranty. A revocation received by
Lender from any one or more Guarantors shall not affect the liability of any
remaining Guarantors under this Guaranty. THIS GUARANTY COVERS A REVOLVING LINE
OF CREDIT AND IT IS SPECIFICALLY ANTICIPATED THAT FLUCTUATIONS WILL OCCUR IN THE
AGGREGATE AMOUNT OF INDEBTEDNESS OWING FROM BORROWER TO LENDER. GRANTOR
SPECIFICALLY ACKNOWLEDGES AND AGREES THAT FLUCTUATIONS IN THE AMOUNT OF
INDEBTEDNESS, EVEN TO ZERO DOLLARS ($ 0.00), SHALL NOT CONSTITUTE A TERMINATION
OF THIS GUARANTY. GUARANTOR'S LIABILITY UNDER THIS GUARANTY SHALL TERMINATE ONLY
UPON (A) TERMINATION IN WRITING BY BORROWER AND LENDER OF THE LINE OF CREDIT,
(B) PAYMENT OF THE INDEBTEDNESS IN FULL IN LEGAL TENDER, AND (C) PAYMENT IN FULL
IN LEGAL TENDER OF ALL OTHER OBLIGATIONS OF GUARANTOR UNDER THIS GUARANTY.
GUARANTOR'S AUTHORIZATION TO LENDER. Guarantor authorizes Lender, WITHOUT NOTICE
OR DEMAND AND WITHOUT LESSENING GUARANTOR'S LIABILITY UNDER THIS GUARANTY, FROM
TIME TO TIME: (A) TO MAKE ONE OR MORE ADDITIONAL SECURED OR UNSECURED LOANS TO
BORROWER, TO LEASE EQUIPMENT OR OTHER GOODS TO BORROWER, OR OTHERWISE TO EXTEND
ADDITIONAL CREDIT TO BORROWER; (B) TO ALTER, COMPROMISE, RENEW, EXTEND,
ACCELERATE, OR OTHERWISE CHANGE ONE OR MORE TIMES THE TIME FOR PAYMENT OR OTHER
TERMS OF THE INDEBTEDNESS OR ANY PART OF THE INDEBTEDNESS, INCLUDING INCREASES
AND DECREASES OF THE RATE OF INTEREST ON THE INDEBTEDNESS; EXTENSIONS MAY BE
REPEATED AND MAY BE FOR LONGER THAN THE ORIGINAL LOAN TERM; (C) TO TAKE AND HOLD
SECURITY FOR THE PAYMENT OF THIS GUARANTY OR THE INDEBTEDNESS; AND EXCHANGE,
ENFORCE, WAIVE, SUBORDINATE, FAIL OR DECIDE NOT TO PERFECT, AND RELEASE ANY SUCH
SECURITY, WITH OR WITHOUT THE SUBSTITUTION OF NEW COLLATERAL; (D) TO RELEASE,
SUBSTITUTE, AGREE NOT TO SUE, OR DEAL WITH ANY ONE OR MORE OF BORROWER'S
SURETIES, ENDORSERS, OR OTHER GUARANTORS ON ANY TERMS OR IN ANY MANNER LENDER
MAY CHOOSE; (E) TO DETERMINE HOW, WHEN AND WHAT APPLICATION OF PAYMENTS AND
CREDITS SHALL BE MADE ON THE INDEBTEDNESS; (F) TO APPLY SUCH SECURITY AND DIRECT
THE ORDER OR MANNER OF SALE THEREOF, INCLUDING WITHOUT LIMITATION, ANY
NONJUDICIAL SALE PERMITTED BY THE TERMS OF THE CONTROLLING SECURITY AGREEMENT OR
DEED OF TRUST, AS LENDER IN ITS DISCRETION MAY DETERMINE; (G) TO SELL, TRANSFER,
ASSIGN, OR GRANT PARTICIPATIONS IN ALL OR ANY PART OF THE INDEBTEDNESS; AND (H)
TO ASSIGN OR TRANSFER THIS GUARANTY IN WHOLE OR IN PART.
GUARANTOR'S REPRESENTATIONS AND WARRANTIES. Guarantor represents and warrants to
Lender that (a) no representations or agreements of any kind have been made to
Guarantor which would limit or qualify in any way the terms of this Guaranty;
(b) this Guaranty is executed at Borrower's request and not at the request of
Lender; (c) Guarantor has full power, right and authority to enter into this
Guaranty; (d) the provisions of
<PAGE>
12-31-1996 COMMERCIAL GUARANTY PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
this Guaranty do not conflict with or result in a default under any agreement or
other instrument binding upon Guarantor and do not result in a violation of any
law, regulation, court decree or order applicable to Guarantor; (e) Guarantor
has not and will not, without the prior written consent of Lender, sell, lease,
assign, encumber, hypothecate, transfer, or otherwise dispose of all or
substantially all of Guarantor's assets, or any interest therein; (f) upon
Lender's request, Guarantor will provide to Lender financial and credit
information in form acceptable to Lender, and all such financial information
which currently has been, and all future financial information which will be
provided to Lender is and will be true and correct in all material respects and
fairly present the financial condition of Guarantor as of the dates the
financial information is provided; (g) no material adverse change has occurred
in Guarantor's financial condition since the date of the most recent financial
statements provided to Lender and no event has occurred which may materially
adversely affect Guarantor's financial condition; (h) no litigation, claim,
investigation, administrative proceeding or similar action (including those for
unpaid taxes) against Guarantor is pending or threatened; (i) Lender has made no
representation to Guarantor as to the creditworthiness of Borrower; and (j)
Guarantor has established adequate means of obtaining from Borrower on a
continuing basis information regarding Borrower's financial condition. Guarantor
agrees to keep adequately informed from such means of any facts, events, or
circumstances which might in any way affect Guarantor's risks under this
Guaranty, and Guarantor further agrees that, absent a request for information,
Lender shall have no obligation to disclose to Guarantor any information or
documents acquired by Lender in the course of its relationship with Borrower.
GUARANTOR'S WAIVERS. Except as prohibited by applicable law, Guarantor waives
any right to require Lender (a) to continue lending money or to extend other
credit to Borrower; (b) to make any presentment, protest, demand, or notice of
any kind, including notice of any nonpayment of the Indebtedness or of any
nonpayment related to any collateral, or notice of any action or nonaction on
the part of Borrower, Lender, any surety, endorser, or other guarantor in
connection with the Indebtedness or in connection with the creation of new or
additional loans or obligations; (c) to resort for payment or to proceed
directly or at once against any person, including Borrower or any other
guarantor; (d) to proceed directly against or exhaust any collateral held by
Lender from Borrower, any other guarantor, or any other person; (e) to give
notice of the terms, time, and place of any public or private sale of personal
property security held by Lender from Borrower or to comply with any other
applicable provisions of the Uniform Commercial Code; (f) to pursue any other
remedy within Lender's power; or (g) to commit any act or omission of any kind,
or at any time, with respect to any matter whatsoever.
If now or hereafter (a) Borrower shall be or become insolvent, and (b) the
Indebtedness shall not at all times until paid be fully secured by collateral
pledged by Borrower, Guarantor hereby forever waives and relinquishes in favor
of Lender and Borrower, and their respective successors, any claim or right to
payment Guarantor may now have or hereafter have or acquire against Borrower, by
subrogation or otherwise, so that at no time shall Guarantor be or become a
"creditor" of Borrower within the meaning of 11 U.S.C. section 547(b), or any
successor provision of the Federal bankruptcy laws.
Guarantor also waives any and all rights or defenses arising by reason of (a)
any "one action" or "anti-deficiency" law or any other law which may prevent
Lender from bringing any action, including a claim for deficiency, against
Guarantor, before or after Lender's commencement or completion of any
foreclosure action, either judicially or by exercise of a power of sale, (b) any
election of remedies by Lender which destroys or otherwise adversely affects
Guarantor's subrogation rights or Guarantor's rights to proceed against Borrower
for reimbursement, including without limitation, any loss of rights Guarantor
may suffer by reason of any law limiting, qualifying, or discharging the
Indebtedness; (c) any disability or other defense of Borrower, of any other
guarantor, or of any other person, or by reason of the cessation of Borrower's
liability from any cause whatsoever, other than payment in full in legal tender,
of the Indebtedness; (d) any right to claim discharge of the Indebtedness on the
basis of unjustified impairment of any collateral for the Indebtedness; (e) any
statute of limitations, if at any time any action or suit brought by Lender
against Guarantor is commenced there is outstanding Indebtedness of Borrower to
Lender which is not barred by any applicable statute of limitations; or (f) any
defenses given to guarantors at law or in equity other than actual payment and
performance of the Indebtedness. If payment is made by Borrower, whether
voluntarily or otherwise, or by any third party, on the Indebtedness and
thereafter Lender is forced to remit the amount of that payment to Borrower's
trustee in bankruptcy or to any similar person under any federal or state
bankruptcy law or law for the relief of debtors, the Indebtedness shall be
considered unpaid for the purpose of enforcement of this Guaranty.
Guarantor further waives and agrees not to assert or claim at any time any
deductions to the amount guaranteed under this Guaranty for any claim of setoff,
counterclaim, counter demand, recoupment or similar right, whether such claim,
demand or right may be asserted by the Borrower, the Guarantor, or both.
<PAGE>
GUARANTOR'S UNDERSTANDING WITH RESPECT TO WAIVERS. Guarantor warrants and agrees
that each of the waivers set forth above is made with Guarantor's full knowledge
of its significance and consequences and that, under the circumstances, the
waivers are reasonable and not contrary to public policy or law. If any such
waiver is determined to be contrary to any applicable law or public policy, such
waiver shall be effective only to the extent permitted by law or public policy.
LENDER'S RIGHT OF SETOFF. In addition to all liens upon and rights of setoff
against the moneys, securities or other property of Guarantor given to Lender by
law, Lender shall have, with respect to Guarantor's obligations to Lender under
this Guaranty and to the extent permitted by law, a contractual possessory
security interest in and a right of setoff against, and Guarantor hereby
assigns, conveys, delivers, pledges, and transfers to Lender all of Guarantor's
right, title and interest in and to, all deposits, moneys, securities and other
property of Guarantor now or hereafter in the possession of or on deposit with
Lender, whether held in a general or special account or deposit, whether held
jointly with someone else, or whether held for safekeeping or otherwise,
excluding however all IRA, Keogh, and trust accounts. Every such security
interest and right of setoff may be exercised without demand upon or notice to
Guarantor. No security interest or right of setoff shall be deemed to have been
waived by any act or conduct on the part of Lender or by any neglect to exercise
such right of setoff or to enforce such security interest or by any delay in so
doing. Every right of setoff and security interest shall continue in full force
and effect until such right of setoff or security interest is specifically
waived or released by an instrument in writing executed by Lender.
SUBORDINATION OF BORROWER'S DEBTS TO GUARANTOR. Guarantor agrees that the
Indebtedness of Borrower to Lender, whether now existing or hereafter created,
shall be prior to any claim that Guarantor may now have or hereafter acquire
against Borrower, whether or not Borrower becomes insolvent. Guarantor hereby
expressly subordinates any claim Guarantor may have against Borrower, upon any
account whatsoever, to any claim that Lender may now or hereafter have against
Borrower. In the event of insolvency and consequent liquidation of the assets of
Borrower, through bankruptcy, by an assignment for the benefit of creditors, by
voluntary liquidation, or otherwise, the assets of Borrower applicable to the
payment of the claims of both Lender and Guarantor shall be paid to Lender and
shall be first applied by Lender to the Indebtedness of Borrower to Lender.
Guarantor does hereby assign to Lender all claims which it may have or acquire
against Borrower or against any assignee or trustee in bankruptcy of Borrower;
provided however, that such assignment shall be effective only for the purpose
of assuring to Lender full payment in legal tender of the Indebtedness. If
Lender so requests, any notes or credit agreements now or hereafter evidencing
any debts or obligations of borrower to Guarantor shall be marked with a legend
that the same are subject to this Guaranty and shall be delivered to Lender.
Guarantor agrees, and Lender hereby is authorized, in the name of Guarantor,
from time to time to execute and file financing statements and continuation
statements and to execute such other documents and to take such other actions as
Lender deems necessary or appropriate to perfect, preserve and enforce its
rights under this Guaranty.
CONFESSION OF JUDGMENT. Guarantor hereby irrevocably authorizes and empowers any
attorney-at-law, including an attorney hired by Lender, to appear in any court
of record and to confess judgment against Guarantor for the unpaid amount of
this Guaranty as evidenced by an affidavit signed by an officer of Lender
setting forth the amount then due, plus attorneys' fees as provided in this
Guaranty, plus costs of suit, and to release all errors, and waive all rights of
appeal. If a copy of this Guaranty, verified by an affidavit, shall have been
filed in the proceeding, it will not be necessary to file the original as a
warrant of attorney. Guarantor waives the right to any stay of execution and the
benefit of all exemption laws now or hereafter in effect.
<PAGE>
12-31-1996 COMMERCIAL GUARANTY PAGE 3
LOAN NO R-I001185 (CONTINUED)
================================================================================
No single exercise of the foregoing warrant and power to confess judgment will
be deemed to exhaust the power, whether or not any such exercise shall be held
by any court to be invalid, voidable, or void; but the power will continue
undiminished and may be exercised from time to time as Lender may elect until
all amounts owing on this Guaranty have been paid in full. Guarantor waives any
conflict of interest that an attorney hired by Lender may have in acting on
behalf of Guarantor in confessing judgment against Guarantor while such attorney
is retained by Lender. Guarantor expressly consents to such attorney acting for
Guarantor in confessing judgment.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Guaranty:
AMENDMENTS. This Guaranty, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Guaranty. No alteration of or amendment to this Guaranty
shall be effective unless given in writing and signed by the party or
parties sought to be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Guaranty has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Guarantor agrees upon
Lender's request to submit to the jurisdiction of the courts of STARK
County, State of Ohio. Lender and Guarantor hereby waive the right to any
jury trial in any action, proceeding, or counterclaim brought by either
Lender or Guarantor against the other. This Guaranty shall be governed by
and construed in accordance with the laws of the State of Ohio.
ATTORNEYS' FEES; EXPENSES. Guarantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses incurred in connection with the enforcement of this Guaranty.
Lender may pay someone else to help enforce this Guaranty, and Guarantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Guarantor also shall pay all court costs and such additional fees
as may be directed by the court.
NOTICES. All notices required to be given by either party to the other
under this Guaranty shall be in writing, may be sent by telefacsimile, and
shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier, or when deposited in the United
States mail, first class postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above or to such other
addresses as either party may designate to the other in writing. If there
is more than one Guarantor, notice to any Guarantor will constitute notice
to all Guarantors. For notice purposes, Guarantor agrees to keep Lender
informed at all times of Guarantor's current address.
INTERPRETATION. In all cases where there is more than one Borrower or
Guarantor, then all words used in this Guaranty in the singular shall be
deemed to have been used in the plural where the context and construction
so require; and where there is more than one Borrower named in this
Guaranty or when this Guaranty is executed by more than one Guarantor, the
words "Borrower" and "Guarantor" respectively shall mean all and any one or
more of them. The words "Guarantor," "Borrower," and "Lender" include the
heirs, successors, assigns, and transferees of each of them. Caption
headings in this Guaranty are for convenience purposes only and are not to
be used to interpret or define the provisions of this Guaranty. If a court
of competent jurisdiction finds any provision of this Guaranty to be
invalid or unenforceable as to any person or circumstance, such finding
shall not render that provision invalid or unenforceable as to any other
persons or circumstances, and all provisions of this Guaranty in all other
respects shall remain valid and enforceable. If any one or more of Borrower
or Guarantor are corporations or partnerships, it is not necessary for
Lender to inquire into the powers of Borrower or Guarantor or of the
officers, directors, partners, or agents acting or purporting to act on
their behalf, and any Indebtedness made or created in reliance upon the
professed exercise of such powers shall be guaranteed under this Guaranty.
<PAGE>
WAIVER. Lender shall not be deemed to have waived any rights under this
Guaranty unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Guaranty shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Guaranty. No prior waiver by Lender, nor any
course of dealing between Lender and Guarantor, shall constitute a waiver
of any of Lender's rights or of any of Guarantor's obligations as to any
future transactions. Whenever the consent of Lender is required under this
Guaranty, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
EACH UNDERSIGNED GUARANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS
GUARANTY AND AGREES TO ITS TERMS. IN ADDITION, EACH GUARANTOR UNDERSTANDS THAT
THIS GUARANTY IS EFFECTIVE UPON GUARANTOR'S EXECUTION AND DELIVERY OF THIS
GUARANTY TO LENDER AND THAT THE GUARANTY WILL CONTINUE UNTIL TERMINATED IN THE
MANNER SET FORTH IN THE SECTION TITLED "DURATION OF GUARANTY." NO FORMAL
ACCEPTANCE BY LENDER IS NECESSARY TO MAKE THIS GUARANTY EFFECTIVE. THIS GUARANTY
IS DATED DECEMBER 31,1996.
NOTICE: FOR THIS NOTICE "YOU" MEANS THE GUARANTOR AND "HIS" MEANS LENDER.
WARNING - BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND COURT
TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST YOU
WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO COLLECT
FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR WHETHER FOR
RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE AGREEMENT,
OR ANY OTHER CAUSE.
GUARANTOR:
X /s/ WILLIAM L. MILLER
------------------------------
WILLIAM L. MILLER
<PAGE>
UNITED BANK
UNITED NATIONAL BANK & TRUST CO.
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000,000 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44720
</TABLE>
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN KIDS STUFF, INC.
(REFERRED TO BELOW AS "GRANTOR"); AND UNITED NATIONAL BANK & TRUST CO. (REFERRED
TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO LENDER A
SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND AGREES THAT
LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT TO THE
COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES
AND FIXTURES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST;
PATENTS, TRADEMARKS, COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR
VEHICLES NOW EXISTING OR HEREINAFTER ACQUIRED OR IN THE PROCEEDS
THEREOF
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in The form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
<PAGE>
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor means Kids Stuff, Inc., its successors and
assigns
GUARANTOR. The word "Guarantor means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surely,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated December 31,
1996, in the principal amount of $800,000.00 from Kids Stuff, Inc. to
Lender, together with all renewals of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in The future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
The grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
<PAGE>
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Ohio. Grantor
has its chief executive office at 7245 Whipple Ave. N.W., North Canton, OH
44720. Grantor will notify Lender of any change in the location of
Grantor's chief executive office.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
by Grantor have been duly authorized by all necessary action by Grantor and
do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws or code of regulations, or any agreement or other instrument
binding upon Grantor or (b) any law, governmental regulation, court decree,
or order applicable to Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws or code of
regulations do not prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
instructions or theretofore shipped or delivered pursuant to a contract of
sale, or for services theretofore performed by Grantor with or for the
account debtor; there shall be no setoffs or counterclaims against any such
account; and no agreement under which any deductions or discounts may be
claimed shall have been made with the account debtor except those disclosed
to Lender in writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled property, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Ohio, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
<PAGE>
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES, ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
In no event shall the insurance be in an amount less than the amount agreed
upon in the Agreement to Provide Insurance. If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement, Lender
may (but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance," which
will cover only Lender's interest in the Collateral.
<PAGE>
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts. Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO R-I001185 (CONTINUED)
================================================================================
not inconsistent with this Agreement or the Related Documents, provided that
Grantor's right to possession and beneficial use shall not apply to any
Collateral where possession of the Collateral by Lender is required by law to
perfect Lender's security interest in such Collateral. Until otherwise noticed
by Lender, Grantor may collect any of the Collateral consisting of accounts. At
any time and even though no Event of Default exists, Lender may exercise its
rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the indebtedness. If Lender at any time
has possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose as
Grantor shall request or as Lender, in Lender's sole discretion, shall deem
appropriate under the circumstances, but failure to honor any request by Grantor
shall not of itself be deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary to preserve any rights
in the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor, the appointment of a receiver
for any part of Grantor's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
<PAGE>
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Ohio Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
<PAGE>
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the indebtedness or apply it to payment of the indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent; and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a safe of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by
<PAGE>
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================================================================================
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of the State
of Ohio. Lender and Grantor hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Grantor
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement, and Grantor
shall pay the costs and expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys' fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive, receipt for, sue and recover
all sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
<PAGE>
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED
DECEMBER 31, 1996.
GRANTOR:
KIDS STUFF, INC.
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
---------------------------- ------------------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
<PAGE>
UNITED BANK
UNITED NATIONAL BANK & TRUST CO.
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: DUNCAN HILL CO., LTD. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN E.A. CAREY OF OHIO,
INC. (REFERRED TO BELOW AS "GRANTOR"); AND UNITED NATIONAL BANK & TRUST CO.
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL, IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL
INTANGIBLES AND FIXTURES, TOGETHER WITH THE FOLLOWING SPECIFICALLY
DESCRIBED PROPERTY: INCLUDING, BUT NOT LIMITED TO THE CUSTOMER
MAILING LIST; PATENTS, TRADEMARKS, COPYRIGHTS, INSURANCE PROCEEDS,
LEASES AND MOTOR VEHICLES NOW EXISTING OR HEREINAFTER ACQUIRED OR IN
THE PROCEEDS THEREOF;
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising, and
wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records
or data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set' forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means Duncan Hill Co. LTD., its successors and
assigns
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness," includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor or any one or more of them
whether existing now or later; whether they are voluntary or involuntary,
due or not due direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness (may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated December 31,
1996, in the principal amount of $800 000.00 from E.A. Carey of Ohio, Inc.
to Lender, together with all renewals, of, extensions of, modifications of,
refinancings of, consolidations of and substitutions for the note or credit
agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest in and hereby assigns, conveys, delivers, pledges, and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Ohio. Grantor
has its chief Executive office at 7245 Whipple Ave. N.W., North Canton, OH
44720. Grantor will notify Lender of any change in the location of
Grantor's chief Executive office.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
by Grantor have been duly authorized by all necessary action by Grantor and
do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws or code of regulations, or any agreement or other instrument
binding upon Grantor or (b) any law, governmental regulation, court decree,
or order applicable to Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor file
a carbon, photographic or other reproduction of any financing statement or
of this Agreement for use as a financing statement. Grantor will reimburse
Lender for all expenses for the perfection and the continuation of the
perfection of Lender's security interest in the Collateral. Grantor
promptly will notify Lender before any change in Grantor's name including
any change to the assumed business names of Grantor. THIS IS A CONTINUING
SECURITY AGREEMENT AND WILL CONTINUE IN EFFECT EVEN THOUGH ALL OR ANY PART
OF THE INDEBTEDNESS IS PAID IN FULL AND EVEN THOUGH FOR A PERIOD OF TIME
GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws or code of
regulations do not prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account repreenting an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
instructions or theretofore shipped or delivered pursuant to a contract of
sale, or for services theretofore performed by Grantor with or for the
account debtor; there shall be no setoffs or counterclaims against any such
account and no agreement under which any deductions or discounts may be
claimed shall have been made with the account debtor except those disclosed
to Lender in writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent'
the Collateral consists of intangible, property such as accounts, the
records concerning the Collateral) at Grantors address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled properly, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles,
outside the State of Ohio, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender, all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender s
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent and, location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
<PAGE>
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender's
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation, manufacture, storage,
transportation, treatment, disposal, release, or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA") the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA") the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable slate or Federal laws rules or regulations
adopted pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days' prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act, omission or default of Grantor
or any other person. In connection with all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
In no event shall the insurance be in an amount less than the amount agreed
upon in the Agreement to Provide Insurance. If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement, Lender
may (but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance", which
will cover only Lender's interest in the Collateral.
<PAGE>
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficien,t Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor, upon request of Lender, shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition, Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO R-I001185 (CONTINUED)
================================================================================
not inconsistent with this Agreement or the Related Documents, provided that
Grantor's right to possession and beneficial use shall not apply to any
Collateral where possession of the Collateral by Lender is required by law to
perfect Lender's security interest in such Collateral. Until otherwise notified
by Lender, Grantor may collect any of the Collateral consisting of accounts. At
any time and even though no Event of Default exists, Lender may exercise its
rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the Indebtedness. If Lender at any time
has possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose as
Grantor shall request or as Lender, in Lender's sole discretion, shall deem
appropriate under the circumstances, but failure to honor any request by Grantor
shall not of itself be deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary to preserve any rights
in the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantors existence as a going
business, the insolvency of Grantor, the appointment of a receiver for any
part of Grantors property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Grantor.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
<PAGE>
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lenders sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Ohio Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized market, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
<PAGE>
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent, and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lenders rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4
LOAN NO R-I001185 (CONTINUED)
================================================================================
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of the State
of Ohio. Lender and Grantor hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Grantor
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
ATTORNEYS' FEES; EXPENSES. Grantor agrees to pay upon demand all of
Lender's costs and expenses, including attorneys' fees and Lender's legal
expenses, incurred in connection with the enforcement of this Agreement.
Lender may pay someone else to help enforce this Agreement and Grantor
shall pay the costs and, expenses of such enforcement. Costs and expenses
include Lender's attorneys' fees and legal expenses whether or not there is
a lawsuit, including attorneys fees and legal expenses for bankruptcy
proceedings (and including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection
services. Grantor also shall pay all court costs and such additional fees
as may be directed by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several, and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail, first class, postage
prepaid, addressed to the party to whom the notice is to be given at the
address shown above. Any party may change its address for notices under
this Agreement by giving formal written notice to the other parties
specifying that the purpose of the notice is to change the party's address.
To the extent permitted by applicable law, if there is more than one
Grantor, notice to any Grantor will constitute notice to all Grantors. For
notice purposes, Grantor will keep Lender informed at all times of
Grantor's current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact, irrevocably, with full power of substitution to do the
following: (a) to demand, collect, receive receipt for, sue and recover all
sums of money or other property which may now or hereafter become due,
owing or payable from the Collateral; (b) to execute, sign and endorse any
and all claims, instruments, receipts, checks, drafts or warrants issued in
payment for the Collateral; (c) to settle or compromise any and all claims
arising under the Collateral, and, in the place and stead of Grantor, to
execute and deliver its release and settlement for the claim; and (d) to
file any claim or claims or to take any action or institute or take part in
any proceedings, either in its own name or in the name of Grantor, or
otherwise, which in the discretion of Lender may seem to be necessary or
advisable. This power is given as security for the Indebtedness, and the
authority hereby conferred is and shall be irrevocable and shall remain in
full force and effect until renounced by Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
<PAGE>
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral, this Agreement shall be binding upon and inure to the
benefit of the parties, their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Grantor, shall constitute a waiver of
any of Lender's rights or of any of Grantor's obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 31
1996.
GRANTOR:
E.A. CAREY OF OHIO, INC.
<TABLE>
<S> <C>
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
-------------------------------- ----------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
</TABLE>
<PAGE>
UNITED BANK
UNITED NATIONAL BANK & TRUST CO.
COMMERCIAL SECURITY AGREEMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000,000 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: E.A. CAREY OF OHIO, INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
THIS COMMERCIAL SECURITY AGREEMENT IS ENTERED INTO BETWEEN E.A. CAREY OF OHIO,
INC. (REFERRED TO BELOW AS" GRANTOR"); AND UNITED NATIONAL BANK & TRUST CO.
(REFERRED TO BELOW AS "LENDER"). FOR VALUABLE CONSIDERATION, GRANTOR GRANTS TO
LENDER A SECURITY INTEREST IN THE COLLATERAL TO SECURE THE INDEBTEDNESS AND
AGREES THAT LENDER SHALL HAVE THE RIGHTS STATED IN THIS AGREEMENT WITH RESPECT
TO THE COLLATERAL IN ADDITION TO ALL OTHER RIGHTS WHICH LENDER MAY HAVE BY LAW.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Commercial Security Agreement,
as this Commercial Security Agreement may be amended or modified from time
to time, together with all exhibits and schedules attached to this
Commercial Security Agreement from time to time.
COLLATERAL. The word "Collateral" means the following described property of
Grantor, whether now owned or hereafter acquired, whether now existing or
hereafter arising, and wherever located:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES
AND FIXTURES, TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED
PROPERTY: INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST;
PATENTS, TRADEMARKS, COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR
VEHICLES NOW EXISTING OR HEREINAFTER ACQUIRED OR IN THE PROCEEDS
THEREOF;
In addition, the word "Collateral" includes all the following, whether now
owned or hereafter acquired, whether now existing or hereafter arising,
and wherever located:
(a) All attachments, accessions, accessories, tools, parts, supplies,
increases, and additions to and all replacements of and substitutions
for any property described above.
(b) All products and produce of any of the property described in this
Collateral section.
(c) All accounts, general intangibles, instruments, rents, monies,
payments, and all other rights, arising out of a sale, lease, or other
disposition of any of the property described in this Collateral
section.
(d) All proceeds (including insurance proceeds) from the sale,
destruction, loss, or other disposition of any of the property
described in this Collateral section.
(e) All records and data relating to any of the property described in
this Collateral section, whether in the form of a writing, photograph,
microfilm, microfiche, or electronic media, together with all of
Grantor's right, title, and interest in and to all computer software
required to utilize, create, maintain, and process any such records or
data on electronic media.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means E.A. Carey of Ohio, Inc., its successors
and assigns
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with the Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced by
the Note, including all principal and interest, together with all other
indebtedness and costs and expenses for which Grantor is responsible under
this Agreement or under any of the Related Documents. In addition, the word
"Indebtedness" includes all other obligations, debts and liabilities, plus
interest thereon, of Grantor, or any one or more of them, to Lender, as
well as all claims by Lender against Grantor, or any one or more of them,
whether existing now or later; whether they are voluntary or involuntary,
due or not due, direct or indirect, absolute or contingent, liquidated or
unliquidated; whether Grantor may be liable individually or jointly with
others; whether Grantor may be obligated as guarantor, surety,
accommodation party or otherwise; whether recovery upon such indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such indebtedness may be or hereafter may become otherwise
unenforceable.
LENDER. The word "Lender" means UNITED NATIONAL BANK & TRUST CO., its
successors and assigns.
NOTE. The word "Note" means the note or credit agreement dated December 31,
1996, in the principal amount of $800,000.00 from E.A. carey of Ohio, Inc.,
LTD. to Lender, together with all renewals, of, extensions of,
modifications of, refinancings of, consolidations of and substitutions for
the note or credit agreement.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
RIGHT OF SETOFF. Grantor hereby grants Lender a contractual possessory security
interest, in and hereby assigns, conveys, delivers, pledges and transfers all of
Grantor's right, title and interest in and to Grantor's accounts with Lender
(whether checking, savings, or some other account), including all accounts held
jointly with someone else and all accounts Grantor may open in the future,
excluding, however, all IRA and Keogh accounts, and all trust accounts for which
the grant of a security interest would be prohibited by law. Grantor authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
Indebtedness against any and all such accounts.
OBLIGATIONS OF GRANTOR. Grantor warrants and covenants to Lender as follows:
ORGANIZATION. Grantor is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Ohio. Grantor
has its chief Executive office at 7245 Whipple Ave. N.W., North Canton, OH
44720. Grantor will notify Lender of any change in the location of
Grantor's chief Executive office.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
by Grantor have been duly authorized by all necessary action by Grantor and
do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws or code of regulations, or any agreement or other instrument
binding upon Grantor or (b) any law, governmental regulation, court decree,
or order applicable to Grantor.
PERFECTION OF SECURITY INTEREST. Grantor agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's security interest in the Collateral. Upon
request of Lender, Grantor will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Grantor will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Grantor hereby appoints Lender as its irrevocable
attorney-in-fact for the purpose of executing any documents necessary to
perfect or to continue the security interest granted in this Agreement.
Lender may at any time, and without further authorization from Grantor,
file a carbon, photographic or other reproduction of any financing
statement or of this Agreement for use as a financing statement. Grantor
will reimburse Lender for all expenses for the perfection and the
continuation of the perfection of Lender's security interest in the
Collateral. Grantor promptly will notify Lender before any change in
Grantor's name including any change to the assumed business names of
Grantor. THIS IS A CONTINUING SECURITY AGREEMENT AND WILL CONTINUE IN
EFFECT EVEN THOUGH ALL OR ANY PART OF THE INDEBTEDNESS IS PAID IN FULL AND
EVEN THOUGH FOR A PERIOD OF TIME GRANTOR MAY NOT BE INDEBTED TO LENDER.
NO VIOLATION. The execution and delivery of this Agreement will not violate
any law or agreement governing Grantor or to which Grantor is a party, and
its certificate or articles of incorporation and bylaws or code of
regulations do not prohibit any term or condition of this Agreement.
ENFORCEABILITY OF COLLATERAL. To the extent the Collateral consists of
accounts, chattel paper, or general intangibles, the Collateral is
enforceable in accordance with its terms, is genuine, and complies with
applicable laws concerning form, content and manner of preparation and
execution, and all persons appearing to be obligated on the Collateral have
authority and capacity to contract and are in fact obligated as they appear
to be on the Collateral. At the time any account becomes subject to a
security interest in favor of Lender, the account shall be a good and valid
account representing an undisputed, bona fide indebtedness incurred by the
account debtor, for merchandise held subject to delivery
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 2
LOAN NO R-I001185 (CONTINUED)
================================================================================
instructions or theretofore shipped or delivered pursuant to a contract of
sale, or for services theretofore performed by Grantor with or for the
account debtor; there shall be no setoffs or counterclaims against any such
account and no agreement under which any deductions or discounts may be
claimed shall have been made with the account debtor except those disclosed
to Lender in writing.
LOCATION OF THE COLLATERAL. Grantor, upon request of Lender, will deliver
to Lender in form satisfactory to Lender a schedule of real properties and
Collateral locations relating to Grantor's operations, including without
limitation the following: (a) all real property owned or being purchased by
Grantor; (b) all real property being rented or leased by Grantor; (c) all
storage facilities owned, rented, leased, or being used by Grantor; and (d)
all other properties where Collateral is or may be located. Except in the
ordinary course of its business, Grantor shall not remove the Collateral
from its existing locations without the prior written consent of Lender.
REMOVAL OF COLLATERAL. Grantor shall keep the Collateral (or to the extent'
the Collateral consists of intangible property such as accounts, the
records concerning the Collateral) at Grantor's address shown above, or at
such other locations as are acceptable to Lender. Except in the ordinary
course of its business, including the sales of inventory, Grantor shall not
remove the Collateral from its existing locations without the prior written
consent of Lender. To the extent that the Collateral consists of vehicles,
or other titled properly, Grantor shall not take or permit any action which
would require application for certificates of title for the vehicles
outside the State of Ohio, without the prior written consent of Lender.
TRANSACTIONS INVOLVING COLLATERAL. Except for inventory sold or accounts
collected in the ordinary course of Grantor's business, Grantor shall not
sell, offer to sell, or otherwise transfer or dispose of the Collateral.
While Grantor is not in default under this Agreement, Grantor may sell
inventory, but only in the ordinary course of its business and only to
buyers who qualify as a buyer in the ordinary course of business. A sale in
the ordinary course of Grantor's business does not include a transfer in
partial or total satisfaction of a debt or any bulk sale. Grantor shall not
pledge, mortgage, encumber or otherwise permit the Collateral to be subject
to any lien, security interest, encumbrance, or charge, other than the
security interest provided for in this Agreement, without the prior written
consent of Lender. This includes security interests even if junior in right
to the security interests granted under this Agreement. Unless waived by
Lender all proceeds from any disposition of the Collateral (for whatever
reason) shall be held in trust for Lender and shall not be commingled with
any other funds; provided however, this requirement shall not constitute
consent by Lender to any sale or other disposition. Upon receipt, Grantor
shall immediately deliver any such proceeds to Lender.
TITLE. Grantor represents and warrants to Lender that it holds good and
marketable title to the Collateral, free and clear of all liens and
encumbrances except for the lien of this Agreement. No financing statement
covering any of the Collateral is on file in any public office other than
those which reflect the security interest created by this Agreement or to
which Lender has specifically consented. Grantor shall defend Lender's
rights in the Collateral against the claims and demands of all other
persons.
COLLATERAL SCHEDULES AND LOCATIONS. As often as Lender shall require, and
insofar as the Collateral consists of accounts and general intangibles,
Grantor shall deliver to Lender schedules of such Collateral, including
such information as Lender may require, including without limitation names
and addresses of account debtors and agings of accounts and general
intangibles. Insofar as the Collateral consists of inventory and equipment,
Grantor shall deliver to Lender, as often as Lender shall require, such
lists, descriptions, and designations of such Collateral as Lender may
require to identify the nature, extent, and location of such Collateral.
Such information shall be submitted for Grantor and each of its
subsidiaries or related companies.
<PAGE>
MAINTENANCE AND INSPECTION OF COLLATERAL. Grantor shall maintain all
tangible Collateral in good condition and repair. Grantor will not commit
or permit damage to or destruction of the Collateral or any part of the
Collateral. Lender and its designated representatives and agents shall have
the right at all reasonable times to examine, inspect, and audit the
Collateral wherever located. Grantor shall immediately notify Lender of all
cases involving the return, rejection, repossession, loss or damage of or
to any Collateral; of any request for credit or adjustment or of any other
dispute arising with respect to the Collateral; and generally of all
happenings and events affecting the Collateral or the value or the amount
of the Collateral.
TAXES ASSESSMENTS AND LIENS. Grantor will pay when due all taxes,
assessments and liens upon the Collateral, its use or operation, upon this
Agreement, upon any promissory note or notes evidencing the Indebtedness,
or upon any of the other Related Documents. Grantor may withhold any such
payment or may elect to contest any lien if Grantor is in good faith
conducting an appropriate proceeding to contest the obligation to pay and
so long as Lender's interest in the Collateral is not jeopardized in
Lender's sole opinion. If the Collateral is subjected to a lien which is
not discharged within fifteen (15) days, Grantor shall deposit with Lender
cash, a sufficient corporate surety bond or other security satisfactory to
Lender in an amount adequate to provide for the discharge of the lien plus
any interest, costs, attorneys' fees or other charges that could accrue as
a result of foreclosure or sale of the Collateral. In any contest Grantor
shall defend itself and Lender and shall satisfy any final adverse judgment
before enforcement against the Collateral. Grantor shall name Lender as an
additional obligee under any surety bond furnished in the contest
proceedings.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Grantor shall comply promptly
with all laws, ordinances, rules and regulations of all governmental
authorities, now or hereafter in effect, applicable to the ownership,
production, disposition, or use of the Collateral. Grantor may contest in
good faith any such law, ordinance or regulation and withhold compliance
during any proceeding, including appropriate appeals, so long as Lender s
interest in the Collateral, in Lender's opinion, is not jeopardized.
HAZARDOUS SUBSTANCES. Grantor represents and warrants that the Collateral
never has been, and never will be so long as this Agreement remains a lien
on the Collateral, used for the generation manufacture, storage,
transportation, treatment, disposal, release or threatened release of any
hazardous waste or substance, as those terms are defined in the
Comprehensive Environmental Response, Compensation, and Liability Act of
1980 as amended 42 U.S.C. Section 9601, et seq. ("CERCLA") the Superfund
Amendments and Reauthorization Act of 1986 Pub. L. No. 99-499 ("SARA") the
Hazardous Materials Transportation Act 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act 42 U.S.C. Section 6901, et seq., or
other applicable slate or Federal laws' rules or regulations adopted
pursuant to any of the foregoing. The terms "hazardous waste" and
"hazardous substance" shall also include, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos. The
representations and warranties contained herein are based on Grantor's due
diligence in investigating the Collateral for hazardous wastes and
substances. Grantor hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Grantor becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims and losses
resulting from a breach of this provision of this Agreement. This
obligation to indemnify shall survive the payment of the Indebtedness and
the satisfaction of this Agreement.
MAINTENANCE OF CASUALTY INSURANCE. Grantor shall procure and maintain all
risks insurance, including without limitation fire, theft and liability
coverage together with such other insurance as Lender may require with
respect to the Collateral, in form, amounts, coverages and basis reasonably
acceptable to Lender and issued by a company or companies reasonably
acceptable to Lender. Grantor, upon request of Lender, will deliver to
Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days, prior written
notice to Lender and not including any disclaimer of the insurer's
liability for failure to give such a notice. Each insurance policy also
shall include an endorsement providing that coverage in favor of Lender
will not be impaired in any way by any act omission or default of Grantor
or any other person. In connection with, all policies covering assets in
which Lender holds or is offered a security interest, Grantor will provide
Lender with such loss payable or other endorsements as Lender may require.
In no event shall the insurance be in an amount less than the amount agreed
upon in the Agreement to Provide Insurance. If Grantor at any time fails to
obtain or maintain any insurance as required under this Agreement Lender
may (but shall not be obligated to) obtain such insurance as Lender deems
appropriate, including if it so chooses "single interest insurance", which
will cover only Lenders interest in the Collateral.
<PAGE>
APPLICATION OF INSURANCE PROCEEDS. Grantor shall promptly notify Lender of
any loss or damage to the Collateral. Lender may make proof of loss if
Grantor fails to do so within fifteen (15) days of the casualty. All
proceeds of any insurance on the Collateral, including accrued proceeds
thereon, shall be held by Lender as part of the Collateral. If Lender
consents to repair or replacement of the damaged or destroyed Collateral,
Lender shall, upon satisfactory proof of expenditure, pay or reimburse
Grantor from the proceeds for the reasonable cost of repair or restoration.
If Lender does not consent to repair or replacement of the Collateral,
Lender shall retain a sufficient amount of the proceeds to pay all of the
Indebtedness, and shall pay the balance to Grantor. Any proceeds which have
not been disbursed within six (6) months after their receipt and which
Grantor has not committed to the repair or restoration of the Collateral
shall be used to prepay the Indebtedness.
INSURANCE RESERVES. Lender may require Grantor to maintain with Lender
reserves for payment of insurance premiums, which reserves shall be created
by monthly payments from Grantor of a sum estimated by Lender to be
sufficient to produce, at least fifteen (15) days before the premium due
date, amounts at least equal to the insurance premiums to be paid. If
fifteen (15) days before payment is due, the reserve funds are
insufficient, Grantor shall upon demand pay any deficiency to Lender. The
reserve funds shall be held by Lender as a general deposit and shall
constitute a non-interest-bearing account which Lender may satisfy by
payment of the insurance premiums required to be paid by Grantor as they
become due. Lender does not hold the reserve funds in trust for Grantor,
and Lender is not the agent of Grantor for payment of the insurance
premiums required to be paid by Grantor. The responsibility for the payment
of premiums shall remain Grantor's sole responsibility.
INSURANCE REPORTS. Grantor upon request of Lender shall furnish to Lender
reports on each existing policy of insurance showing such information as
Lender may reasonably request including the following: (a) the name of the
insurer; (b) the risks insured; (c) the amount of the policy; (d) the
property insured; (e) the then current value on the basis of which
insurance has been obtained and the manner of determining that value; and
(f) the expiration date of the policy. In addition Grantor shall upon
request by Lender (however not more often than annually) have an
independent appraiser satisfactory to Lender determine, as applicable, the
cash value or replacement cost of the Collateral.
GRANTOR'S RIGHT TO POSSESSION AND TO COLLECT ACCOUNTS. Until default and except
as otherwise provided below with respect to accounts, Grantor may have
possession of the tangible personal property and beneficial use of all the
Collateral and may use it in any lawful manner
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 3
LOAN NO R-I001185 (CONTINUED)
================================================================================
not inconsistent with this Agreement or the Related Documents, provided that
Grantor's right to possession and beneficial use shall not apply to any
Collateral where possession of the Collateral by Lender is required by law to
perfect Lender's security interest in such Collateral. Until otherwise notified
by Lender, Grantor may collect any of the Collateral consisting of accounts. At
any time and even though no Event of Default exists, Lender may exercise its
rights to collect the accounts and to notify account debtors to make payments
directly to Lender for application to the Indebtedness. If Lender at any time
has possession of any Collateral, whether before or after an Event of Default,
Lender shall be deemed to have exercised reasonable care in the custody and
preservation of the Collateral if Lender takes such action for that purpose as
Grantor shall request or as Lender, in Lender's sole discretion, shall deem
appropriate under the circumstances, but failure to honor any request by Grantor
shall not of itself be deemed to be a failure to exercise reasonable care.
Lender shall not be required to take any steps necessary to preserve any rights
in the Collateral against prior parties, nor to protect, preserve or maintain
any security interest given to secure the Indebtedness.
EXPENDITURES BY LENDER. If not discharged or paid when due, Lender may (but
shall not be obligated to) discharge or pay any amounts required to be
discharged or paid by Grantor under this Agreement, including without limitation
all taxes, liens, security interests, encumbrances, and other claims, at any
time levied or placed on the Collateral. Lender also may (but shall not be
obligated to) pay all costs for insuring, maintaining and preserving the
Collateral. All such expenditures incurred or paid by Lender for such purposes
will then bear interest at the rate charged under the Note from the date
incurred or paid by Lender to the date of repayment by Grantor. All such
expenses shall become a part of the Indebtedness and, at Lender's option, will
(a) be payable on demand, (b) be added to the balance of the Note and be
apportioned among and be payable with any installment payments to become due
during either (i) the term of any applicable insurance policy or (ii) the
remaining term of the Note, or (c) be treated as a balloon payment which will be
due and payable at the Note's maturity. This Agreement also will secure payment
of these amounts. Such right shall be in addition to all other rights and
remedies to which Lender may be entitled upon the occurrence of an Event of
Default.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Grantor to make any payment when due on
the Indebtedness.
OTHER DEFAULTS. Failure of Grantor to comply with or to perform any other
term, obligation, covenant or condition contained in this Agreement or in
any of the Related Documents or in any other agreement between Lender and
Grantor.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Grantor under this Agreement, the
Note or the Related Documents is false or misleading in any material
respect, either now or at the time made or furnished.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
documents to create a valid and perfected security interest or lien) at any
time and for any reason.
INSOLVENCY. The dissolution or termination of Grantor's existence as a
going business, the insolvency of Grantor the appointment of a receiver for
any part of Grantor's properly, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Grantor.
<PAGE>
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Grantor or by any
governmental agency against the Collateral or any other collateral securing
the Indebtedness. This includes a garnishment of any of Grantor's deposit
accounts with Lender. However, this Event of Default shall not apply if
there is a good faith dispute by Grantor as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding and if Grantor gives Lender written notice of the
creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount
determined by Lender, in its sole discretion, as being an adequate reserve
or bond for the dispute.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or such Guarantor dies or
becomes incompetent. Lender, at its option, may, but shall not be required
to, permit the Guarantor's estate to assume unconditionally the obligations
arising under the guaranty in a manner satisfactory to Lender, and, in
doing so, cure the Event of Default.
ADVERSE CHANGE. A material adverse change occurs in Grantor's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Grantor has not been given a prior notice of a breach of the
same provision of this Agreement, it may be cured (and no Event of Default
will have occurred) if Grantor, after Lender sends written notice demanding
cure of such default, (a) cures the default within fifteen (15) days; or
(b), if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
RIGHTS AND REMEDIES ON DEFAULT. If an Event of Default occurs under this
Agreement, at any time thereafter, Lender shall have all the rights of a secured
party under the Ohio Uniform Commercial Code. In addition and without
limitation, Lender may exercise any one or more of the following rights and
remedies:
ACCELERATE INDEBTEDNESS. Lender may declare the entire Indebtedness,
including any prepayment penalty which Grantor would be required to pay,
immediately due and payable, without notice.
ASSEMBLE COLLATERAL. Lender may require Grantor to deliver to Lender all or
any portion of the Collateral and any and all certificates of title and
other documents relating to the Collateral. Lender may require Grantor to
assemble the Collateral and make it available to Lender at a place to be
designated by Lender. Lender also shall have full power to enter upon the
property of Grantor to take possession of and remove the Collateral. If the
Collateral contains other goods not covered by this Agreement at the time
of repossession, Grantor agrees Lender may take such other goods, provided
that Lender makes reasonable efforts to return them to Grantor after
repossession.
SELL THE COLLATERAL. Lender shall have full power to sell, lease, transfer,
or otherwise deal with the Collateral or proceeds thereof in its own name
or that of Grantor. Lender may sell the Collateral at public auction or
private sale. Unless the Collateral threatens to decline speedily in value
or is of a type customarily sold on a recognized marker, Lender will give
Grantor reasonable notice of the time after which any private sale or any
other intended disposition of the Collateral is to be made. The
requirements of reasonable notice shall be met if such notice is given at
least ten (10) days before the time of the sale or disposition. All
expenses relating to the disposition of the Collateral, including without
limitation the expenses of retaking, holding, insuring, preparing for sale
and selling the Collateral, shall become a part of the Indebtedness secured
by this Agreement and shall be payable on demand, with interest at the Note
rate from date of expenditure until repaid.
APPOINT RECEIVER. To the extent permitted by applicable law, Lender shall
have the following rights and remedies regarding the appointment of a
receiver: (a) Lender may have a receiver appointed as a matter of right,
(b) the receiver may be an employee of Lender and may serve without bond,
and (c) all fees of the receiver and his or her attorney shall become part
of the Indebtedness secured by this Agreement and shall be payable on
demand, with interest at the Note rate from date of expenditure until
repaid.
<PAGE>
COLLECT REVENUES, APPLY ACCOUNTS. Lender, either itself or through a
receiver, may collect the payments, rents, income, and revenues from the
Collateral. Lender may at any time in its discretion transfer any
Collateral into its own name or that of its nominee and receive the
payments, rents, income, and revenues therefrom and hold the same as
security for the Indebtedness or apply it to payment of the Indebtedness in
such order of preference as Lender may determine. Insofar as the Collateral
consists of accounts, general intangibles, insurance policies, instruments,
chattel paper, choses in action, or similar property, Lender may demand,
collect, receipt for, settle, compromise, adjust, sue for, foreclose, or
realize on the Collateral as Lender may determine, whether or not
Indebtedness or Collateral is then due. For these purposes, Lender may, on
behalf of and in the name of Grantor, receive, open and dispose of mail
addressed to Grantor; change any address to which mail and payments are to
be sent, and endorse notes, checks, drafts, money orders, documents of
title, instruments and items pertaining to payment, shipment, or storage of
any Collateral. To facilitate collection, Lender may notify account debtors
and obligors on any Collateral to make payments directly to Lender.
OBTAIN DEFICIENCY. If Lender chooses to sell any or all of the Collateral,
Lender may obtain a judgment against Grantor for any deficiency remaining
on the Indebtedness due to Lender after application of all amounts received
from the exercise of the rights provided in this Agreement. Grantor shall
be liable for a deficiency even if the transaction described in this
subsection is a sale of accounts or chattel paper.
OTHER RIGHTS AND REMEDIES. Lender shall have all the rights and remedies of
a secured creditor under the provisions of the Uniform Commercial Code, as
may be amended from time to time. In addition, Lender shall have and may
exercise any or all other rights and remedies it may have available at law,
in equity, or otherwise.
CUMULATIVE REMEDIES. All of Lender's rights and remedies, whether evidenced
by this Agreement or the Related Documents or by any other writing, shall
be cumulative and may be exercised singularly or concurrently. Election by
Lender to pursue any remedy shall not exclude pursuit of any other remedy,
and an election to make expenditures or to take action to perform an
obligation of Grantor under this Agreement, after Grantor's failure to
perform, shall not affect Lender's right to declare a default and to
exercise its remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given In writing and signed by
<PAGE>
12-31-1996 COMMERCIAL SECURITY AGREEMENT PAGE 4
LOAN NO R-I001185 (CONTINUED)
================================================================================
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Ohio. If there is a lawsuit, Grantor agrees upon
Lender's request to submit to the jurisdiction of the courts of the State
of Ohio. Lender and Grantor hereby waive the right to any jury trial in any
action, proceeding, or counterclaim brought by either Lender or Grantor
against the other. This Agreement shall be governed by and construed in
accordance with the laws of the State of Ohio.
ATTORNEYS FEES; EXPENSES. Grantor agrees to pay upon demand all of Lender's
costs and expenses, including attorneys' fees and Lender's legal expenses,
incurred in connection with the enforcement of this Agreement. Lender may
pay someone else to help enforce this Agreement, and Grantor shall pay the
costs and expenses of such enforcement. Costs and expenses include Lender's
attorneys' fees and legal expenses whether or not there is a lawsuit,
including attorneys fees and legal expenses for bankruptcy proceedings (and
including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Grantor
also shall pay all court costs and such additional fees as may be directed
by the court.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Grantor under
this Agreement shall be joint and several and all references to Grantor
shall mean each and every Grantor. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
NOTICES. All notices required to be given under this Agreement shall be
given in writing may be sent by telefacsimile and shall be effective when
actually delivered or when deposited with a nationally recognized overnight
courier or deposited in the United States mail first class postage prepaid
addressed to the party to whom the notice is to be given at the address
shown above. Any party may change its address for notices under this
Agreement by giving formal written notice to the other parties specifying
that the purpose of the notice is to change the party's address. To the
extent permitted by applicable law, if there is more than one Grantor
notice to any Grantor will constitute notice to all Grantors. For notice
purposes Grantor will keep Lender informed at all times of Grantor's
current address(es).
POWER OF ATTORNEY. Grantor hereby appoints Lender as its true and lawful
attorney-in-fact irrevocably with full power of substitution to do the
following: (a) to demand collect receive receipt for sue and recover all
sums of money or other property which may now or hereafter become due owing
or payable from the Collateral; (b) to execute sign and endorse any and all
claims instruments receipts checks drafts or warrants issued in payment for
the Collateral; (c) to settle or compromise any and all claims arising
under the Collateral and in the place and stead of Grantor to execute and
deliver its release and settlement for the claim; and (d) to file any claim
or claims or to take any action or institute or take part in any
proceedings either in its own name or in the name of Grantor or otherwise
which in the discretion of Lender may seem to be necessary or advisable.
This power is given as security for the Indebtedness and the authority
hereby conferred is and shall be irrevocable and shall remain in full force
and effect until renounced by Lender.
<PAGE>
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however if the offending provision
cannot be so modified, it shell be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUCCESSOR INTERESTS. Subject to the limitations set forth above on transfer
of the Collateral this Agreement shall be binding upon and inure to the
benefit of the parties their successors and assigns.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lenders right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender nor any
course of dealing between Lender and Grantor shall constitute a waiver of
any of Lenders rights or of any of Grantors obligations as to any future
transactions. Whenever the consent of Lender is required under this
Agreement the granting of such consent by Lender in any instance shall not
constitute continuing consent to subsequent instances where such consent is
required and in all cases such consent may be granted or withheld in the
sole discretion of Lender.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS COMMERCIAL SECURITY
AGREEMENT, AND GRANTOR AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER 31,
1996.
GRANTOR:
E.A. CAREY OF OHIO, INC.
<TABLE>
<S> <C>
BY: /s/ WILLIAM L. MILLER BY: /s/ JEANNE E. MILLER
-------------------------------- ----------------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE VICE PRESIDENT
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CORPORATE RESOLUTION TO GUARANTEE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF INC. (TIN: 32-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
GUARANTOR: DUNCAN HILL CO., LTD
7245 WHIPPLE AVE. N.W.
NORTH CANTON, OH 44720
</TABLE>
================================================================================
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF DUNCAN HILL CO., LTD
(THE "CORPORATION"), HEREBY CERTIFY THAT the Corporation is organized and
existing under and by virtue of the laws of the State of Ohio with its principal
office at 7245 Whipple Ave. N.W., North Canton, OH 44720.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held ON DECEMBER 31, 1996, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that ANY TWO (2) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
William L. Miller President /s/ WILLIAM L. MILLER
Jeanne E. Miller Vice President /s/ JEANNE E. MILLER
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
GUARANTY. To guarantee or act as surety for loans or other financial
accommodations to Kids Stuff, Inc. from UNITED NATIONAL BANK & TRUST CO.
("Lender") on such guarantee or surety terms as may be agreed upon between
the officers or employees of this Corporation and Lender and in such sum or
sums of money as in their judgment should be guaranteed or assured, not
exceeding, however, at any one time the amount of EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($ 800,000.00), in addition to such sum or sums of money as
may be currently guaranteed by the Corporation to Lender (the "Guaranty").
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the Guaranty, any
property now or hereafter belonging to the Corporation or in which the
Corporation now or hereafter may have an interest, including without
limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered. The provisions of these resolutions authorizing or relating to
the pledge, mortgage, transfer, endorsement, hypothecation, granting of a
security interest in, or in any way encumbering, the assets of the
Corporation shall include, without limitation, doing so in order to lend
collateral security for the indebtedness, now or hereafter existing, and of
any nature whatsoever, of Kids Stuff, Inc. to Lender. The Corporation has
considered the value to itself of lending collateral in support of such
indebtedness, and the Corporation represents to Lender that the Corporation
is benefited by doing so.
<PAGE>
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted by
Lender, and which shall evidence the terms and conditions under and pursuant
to which such liens and encumbrances, or any of them, are given; and also to
execute and deliver to Lender any other written instruments, any chattel
paper, or any other collateral, of any kind or nature, which they may in
their discretion deem reasonably necessary or proper in connection with or
pertaining to the giving of the liens and encumbrances. Notwithstanding the
foregoing, any one of the above authorized persons may execute, deliver, or
record financing statements.
FURTHER ACTS. To do and perform such other acts and things and to execute
and deliver such other documents and agreements, INCLUDING AGREEMENTS
WAIVING THE RIGHT TO A TRIAL BY JURY AND CONFESSING JUDGMENT AGAINST THE
CORPORATION, as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON DECEMBER 31, 1996 AND
ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE
SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
X /S/ ILLEGIBLE
----------------------
X
----------------------
NOTE: In case the Secretary or other certifying officer is designated by
the foregoing resolutions as one of the signing officers, it is advisable to
have this certificate signed by a second Officer or Director of the Corporation.
<PAGE>
<TABLE>
<CAPTION>
CORPORATE RESOLUTION TO GUARANTEE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-1001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
GUARANTOR: E.A CAREY OF OHIO, INC.
7245 WHIPPLE AVE. N.W.
NORTH CANTON, OH 44720
</TABLE>
================================================================================
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF E.A. CAREY OF OHIO, INC.
(THE "CORPORATION"), HEREBY CERTIFY THAT the Corporation is organized and
existing under and by virtue of the laws of the State of Ohio with its principal
office at 7245 Whipple Ave. N.W., North Canton, OH 44720.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held ON DECEMBER 31, 1996, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that ANY TWO (2) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
William L. Miller President /s/ WILLIAM L. MILLER
Jeanne E. Miller Vice President /s/ JEANNE E. MILLER
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
GUARANTY. To guarantee or act as surety for loans or other financial
accommodations to Kids Stuff, Inc. from UNITED NATIONAL BANK & TRUST CO.
("Lender") on such guarantee or surety terms as may be agreed upon between
the officers or employees of this Corporation and Lender and in such sum or
sums of money as in their judgment should be guaranteed or assured, not
exceeding, however, at any one time the amount of EIGHT HUNDRED THOUSAND &
00/100 DOLLARS ($800,000.00), in addition to such sum or sums of money as
may be currently guaranteed by the Corporation to Lender (the "Guaranty").
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the Guaranty, any
property now or hereafter belonging to the Corporation or in which the
Corporation now or hereafter may have an interest, including without
limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered. The provisions of these Resolutions authorizing or relating to
the pledge, mortgage, transfer, endorsement, hypothecation, granting of a
security interest in, or in any way encumbering, the assets of the
Corporation shall include, without limitation, doing so in order to lend
collateral security for the indebtedness, now or hereafter existing, and of
any nature whatsoever, of Kids Stuff, Inc. to Lender. The Corporation has
considered the value to itself of lending collateral in support of such
indebtedness, and the Corporation represents to Lender that the Corporation
is benefited by doing so.
<PAGE>
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted by
Lender, and which shall evidence the terms and conditions under and pursuant
to which such liens and encumbrances, or any of them, are given; and also to
execute and deliver to Lender any other written instruments, any chattel
paper, or any other collateral, of any kind or nature, which they may in
their discretion deem reasonably necessary or proper in connection with or
pertaining to the giving of the liens and encumbrances. Notwithstanding the
foregoing, any one of the above authorized persons may execute, deliver, or
record financing statements.
FURTHER ACTS. To do and perform such other acts and things and to execute
and deliver such other documents and agreements, INCLUDING AGREEMENTS
WAIVING THE RIGHT TO A TRIAL BY JURY AND CONFESSING JUDGMENT AGAINST THE
CORPORATION, as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON DECEMBER 31, 1996 AND
ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR GENUINE
SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
X /S/ ILLEGIBLE
----------------------
X ----------------------
NOTE: In case the Secretary or other certifying officer is designated by
the foregoing resolutions as one of the signing officers, it is advisable to
have this certificate signed by a second Officer or Director of the Corporation.
<PAGE>
<TABLE>
<CAPTION>
CORPORATE RESOLUTION TO BORROW
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item
BORROWER: KIDS STUFF INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF KIDS STUFF, INC. (THE
"CORPORATION"), HEREBY CERTIFY THAT the Corporation is organized and existing
under and by virtue of the laws of the State of Ohio as a corporation for
profit, with its principal office at 7245 Whipple Ave. N.W., North Canton, OH
44720, and is duly authorized to transact business in the State of Ohio.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation, duly
called and held ON DECEMBER 3l, 1996, at which a quorum was present and voting,
or by other duly authorized corporate action in lieu of a meeting, the following
resolutions were adopted:
BE IT RESOLVED, that ANY TWO (2) of the following named officers, employees, or
agents of this Corporation, whose actual signatures are shown below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
William L. Miller President /s/ WILLIAM L. MILLER
Jeanne E. Miller Executive Vice President /s/ JEANNE E. MILLER
acting for and on behalf of the Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from UNITED NATIONAL BANK & TRUST
CO. ("Lender"), on such terms as may be agreed upon between the Corporation
and Lender, such sum or sums of money as in their judgment should be
borrowed, without limitation.
EXECUTE NOTES. To execute and deliver to Lender the promissory note or
notes, or other evidence of credit accommodations of the Corporation, on
Lender's forms, at such rates of interest and on such terms as may be
agreed upon, evidencing the sums of money so borrowed or any indebtedness
of the Corporation to Lender, and also to execute and deliver to Lender one
or more renewals, extensions, modifications, refinancings, consolidations,
or substitutions for one or more of the notes, any portion of the notes, or
any other evidence of credit accommodions.
GRANT SECURITY. To mortgage, pledge, transfer, endorse, hypothecate, or
otherwise encumber and deliver to Lender, as security for the payment of
any loans or credit accommoditions so obtained, any promissory notes so
executed (including any amendments to or modifications, renewals, and
extensions of such promissory notes), or any other or further indebtedness
of the Corporation to Lender at any time owing, however the same may be
evidenced, any property now or hereafter belonging to the Corporation or in
which the Corporation now or hereafter may have an interest, including
without limitation all real property and all personal property (tangible or
intangible) of the Corporation. Such property may be mortgaged, pledged,
transferred, endorsed, hypothecated, or encumbered at the time such loans
are obtained or such indebtedness is incurred, or at any other time or
times, and may be either in addition to or in lieu of any property
theretofore mortgaged, pledged, transferred, endorsed, hypothecated, or
encumbered.
EXECUTE SECURITY DOCUMENTS. To execute and deliver to Lender the forms of
mortgage, deed of trust, pledge agreement, hypothecation agreement, and
other security agreements and financing statements which may be submitted
by Lender, and which shall evidence the terms and conditions under and
pursuant to which such liens and encumbrances, or any of them, are given;
and also to execute and deliver to Lender any other written instruments,
any chattel paper, or any other collateral, of any kind or nature, which
they may in their discretion deem reasonably necessary or proper in
connection with or pertaining to the giving of the liens and encumbrances.
Notwithstanding the foregoing, any one of the above authorized persons may
execute, deliver, or record financing statements.
<PAGE>
NEGOTIATE ITEMS. To draw, endorse, and discount with Lender all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation in which the Corporation may
have an interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Lender, or
to cause such other disposition of the proceeds derived therefrom as they
may deem advisable.
LEVELS OF AUTHORITY. Notwithstanding any other provision of these
Resolutions, the following provisions shall apply with respect to levels of
authority: President, Executive Vice President.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, INCLUDING AGREEMENTS WAIVING THE RIGHT TO A TRIAL BY JURY AND
CONFESSING JUDGMENT AGAINST THE CORPORATION, as they may in their
discretion deem reasonably necessary or proper in order to carry into
effect the provisions of these Resolutions. The following person or persons
currently are authorized to request advances and authorize payments under
the line of credit until Lender receives written notice of revocation of
their authority: William L. Miller, President; and Jeanne E. Miller,
Executive Vice President.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these Resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Lender may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Lender. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
BE IT FURTHER RESOLVED, that the Corporation will notify Lender in writing at
Lender's address shown above (or such other addresses as Lender may designate
from time to time) prior to any (a) change in the name of the Corporation, (b)
change in the assumed business name(s) of the Corporation, (c) change in the
management of the Corporation, (d) change in the authorized signer(s), (e)
conversion of the Corporation to a new or different type of business entity, or
(f) change in any other aspect of the Corporation that directly or indirectly
relates to any agreements between the Corporation and Lender. No change in the
name of the Corporation will take effect until after Lender has been notified.
I FURTHER CERTIFY that the officers, employees, and agents named above are duly
elected, appointed, or employed by or for the Corporation, as the case may be,
and occupy the positions set opposite their respective names; that the foregoing
Resolutions now stand of record on the books of the Corporation; and that the
Resolutions are in full force and effect and have not been modified or revoked
in any manner whatsoever. The Corporation has no corporate seal, and therefore,
no seal is affixed to this certificate.
IN TESTIMONY WHEREOF, I HAVE HEREUNTO SET MY HAND ON DECEMBER 31, 1996 AND
ATTEST THAT THE SIGNATURES SET OPPOSITE THE NAMES LISTED ABOVE ARE THEIR
GENUINE SIGNATURES.
CERTIFIED TO AND ATTESTED BY:
X /S/ ILLEGIBLE
----------------------
X
----------------------
NOTE: In case the Secretary or other certifying officer is designated by
the foregoing resolutions as one of the signing officers, it is advisable to
have this certificate signed by a second Officer or Director of the Corporation.
<PAGE>
<TABLE>
<CAPTION>
AGREEMENT TO PROVIDE INSURANCE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL LOAN DATE MATURITY LOAN NO CALL COLLATERAL ACCOUNT OFFICER INITIALS
$800,000.00 12-31-1996 R-I001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
INSURANCE REQUIREMENTS. Kids Stuff, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Lender. These
requirements are set forth in the security documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
COLLATERAL: ALL INVENTORY, EQUIPMENT AND FIXTURES, INCLUDING, BUT NOT LIMITED TO
THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS, COPYRIGHTS,
INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF;
TYPE. All risks, including fire, theft and liability.
AMOUNT. $800,000.00.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Lender. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Lender.
INSURANCE MAILING ADDRESS. All documents and other materials relating to
insurance for this loan should be mailed, delivered or directed to the following
address:
UNITED NATIONAL BANK & TRUST
ATTN: LOAN SUPPORT
624 MARKET AVENUE NORTH
CANTON, OH 44702
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Lender, fifteen (15)
days from the date of this Agreement, evidence of the required insurance as
provided above, with an effective date of December 31, 1996, or earlier. Grantor
acknowledges and agrees that if Grantor fails to provide any required insurance
or fails to continue such insurance in force, Lender may do so at Grantor's
expense as provided in the applicable security document. The cost of any such
insurance, at the option of Lender, shall be payable on demand or shall be added
to the indebtedness as provided in the security document. GRANTOR ACKNOWLEDGES
THAT IF LENDER SO PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE
LIMITED PROTECTION AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE
OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN
ADDITION, THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
<PAGE>
AUTHORIZATION. For purposes of insurance coverage on the Collateral, Grantor
authorizes Lender to provide to any person (including any insurance agent or
company) all information Lender deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED DECEMBER
31, 1996.
GRANTOR:
KIDS STUFF, INC.
By: /s/ WILLIAM L. MILLER By: /s/ JEANNE E. MILLER
---------------------------- ---------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE
VICE PRESIDENT
FOR LENDER USE ONLY
INSURANCE VERIFICATION
DATE:___________________________________ PHONE: (216) 455-1904
AGENT'S NAME: LEONARD INSURANCE
ADDRESS: 220 MARKET AVE. S., CANTON, OHIO 44702
INSURANCE COMPANY: CINCINNATI INSURANCE
POLICY NUMBER(S): CPP5003933AWR
EFFECTIVE DATES:______________________________________________________
COMMENTS:_____________________________________________________________
<PAGE>
<TABLE>
<CAPTION>
NOTICE OF INSURANCE REQUIREMENTS
<S> <C> <C> <C> <C> <C> <C> <C>
LOAN DATE LOAN NO CALL COLLATERAL CUSTOMER NO OFFICER INITIALS
12-31-1996 R-1001185 1465 LED
References in the shaded area are for Lender's use only and do not limit the
applicability of this document to any particular loan or item.
BORROWER: KIDS STUFF INC. (TIN: 34-1843520) LENDER: UNITED NATIONAL BANK & TRUST CO.
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
</TABLE>
================================================================================
TO: LEONARD INSURANCE
CINCINNATI INSURANCE
220 MARKET AVE. S.
CANTON, OHIO 44702 DATE: December 31, 1996
DEAR INSURANCE AGENT:
RE: POLICY NUMBER(S): CPP5003933AWR
KIDS STUFF, INC. ("GRANTOR") IS OBTAINING A LOAN FROM UNITED NATIONAL BANK &
TRUST CO. PLEASE SEND APPROPRIATE EVIDENCE OF INSURANCE TO UNITED NATIONAL BANK
& TRUST CO., TOGETHER WITH THE REQUESTED ENDORSEMENTS, ON THE FOLLOWING
PROPERTY, WHICH BORROWER IS GIVING AS SECURITY FOR THE LOAN.
COLLATERAL: ALL INVENTORY, EQUIPMENT AND FIXTURES, INCLUDING, BUT NOT LIMITED TO
THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS, COPYRIGHTS,
INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF;.
TYPE. All risks, including fire, theft and liability.
AMOUNT. $800,000.00.
BASIS. Replacement value.
ENDORSEMENTS. Lender's loss payable clause with stipulation that
coverage will not be cancelled or diminished without a minimum of
ten (10) days' prior written notice to Lender.
BORROWER:
KIDS STUFF, INC.
BY: /s/ WILLIAM L. MILLER /s/ JEANNE E. MILLER
---------------------------- ---------------------------
WILLIAM L. MILLER, PRESIDENT JEANNE E. MILLER, EXECUTIVE
VICE PRESIDENT
MAIL TO:
UNITED NATIONAL BANK & TRUST
ATTN: LOAN SUPPORT
624 MARKET AVENUE NORTH
CANTON, OH 44702
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
E.A. CAREY OF OHIO, INC. UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: STARK COUNTY RECORDER
E.A. Carey of Ohio, Inc. (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
By: /s/ WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
& Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
E.A. CAREY OF OHIO, INC. UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: SECRETARY OF STATE OF OHIO
E.A. Carey of Ohio, Inc. (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
By: /s/ WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
DUNCAN HILL CO., LTD UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: STARK COUNTY RECORDER
Duncan Hill Co., LTD (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
BY: /s/ WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
DUNCAN HILL CO., LTD UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: SECRETARY OF STATE OF OHIO
Duncan Hill Co., LTD. (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
BY: WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
KIDS STUFF, INC. UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: STARK COUNTY RECORDER
Kids Stuff, Inc. (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
BY: /s/ WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
<TABLE>
<CAPTION>
This FINANCING STATEMENT is presented to a filing officer for filing pursuant to
the Uniform Commercial Code.
<S> <C> <C>
1 Debtor(s) (Last Name First) and Address(es) 2 Secured Party(ies) and Address(es) 3 For Filing Officer
KIDS STUFF, INC. UNITED NATIONAL BANK & TRUST CO. (Date, Time, Number, and Filing Office)
7245 WHIPPLE AVE. N.W. P.O. BOX 24190
NORTH CANTON, OH 44720 220 MARKET AVENUE SOUTH
CANTON, OH 44702
4 This financing statement covers the following types (or items) of property:
ALL INVENTORY, CHATTEL PAPER, ACCOUNTS, EQUIPMENT, GENERAL INTANGIBLES AND
FIXTURES; TOGETHER WITH THE FOLLOWING SPECIFICALLY DESCRIBED PROPERTY:
INCLUDING, BUT NOT LIMITED TO THE CUSTOMER MAILING LIST; PATENTS, TRADEMARKS,
COPYRIGHTS, INSURANCE PROCEEDS, LEASES AND MOTOR VEHICLES NOW EXISTING OR
HEREINAFTER ACQUIRED OR IN THE PROCEEDS THEREOF; WHETHER ANY OF THE FOREGOING IS
OWNED NOW OR ACQUIRED LATER; ALL ACCESSIONS, ADDITIONS, REPLACEMENTS, AND
SUBSTITUTIONS RELATING TO ANY OF THE FOREGOING; ALL RECORDS OF ANY KIND RELATING
TO ANY OF THE FOREGOING; ALL PROCEEDS RELATING TO ANY OF THE FOREGOING
(INCLUDING INSURANCE, GENERAL INTANGIBLES AND OTHER ACCOUNTS PROCEEDS).
Check [X] if covered: [X] Products of Collateral are also covered No. of additional sheets presented:
Filed with: SECRETARY OF STATE OF OHIO
Kids Stuff, Inc. (USE WHICHEVER SIGNATURE LINE IS APPLICABLE)
WILLIAM L. MILLER, PRESIDENT AND JEANNE E. MILLER, VICE PRESIDENT UNITED NATIONAL BANK & TRUST CO.
BY: /s/ WILLIAM L. MILLER By:
-------------------------- ---------------------------------
Signature(s) of Debtor(s) Signature(s) of Secured Party(ies)
By:___________________________ Leo E. Doyle, Senior Vice President &
Executive Officer
</TABLE>
- --------------------------------------------------------------------------------
(1) FILING OFFICER COPY - ALPHABETICAL
STANDARD FORM - UNIFORM COMMERCIAL CODE - FORM UCC-1
<PAGE>
EXHIBIT 23.0
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Havana Group, Inc.
Canton, Ohio 44718
As independent certified public accountants for The Havana Group, Inc., we
hereby consent to the use in Amendment No. 1 to Form SB-2 Registration Statement
for The Havana Group, Inc. of our report included herein, which has a date of
February 10, 1998, relating to the consolidated balance sheet of The Havana
Group, Inc. and Subsidiary as of December 31, 1997 and the related consolidated
statements of operations, cash flows and stockholder's equity for the years
ended December 31, 1997 and 1996, and to the reference to our firm under the
caption "Experts" in the Prospectus.
Hausser + Taylor LLP
Canton, Ohio
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATIN EXTRACTED FROM THE FINANCIAL
STATEMENTS AND RELATED NOTES THERETO OF THE THE HAVANA GROUP, INC. FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-21-1997 DEC-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 79,611 5,875
<SECURITIES> 0 0
<RECEIVABLES> 43,074 39,780
<ALLOWANCES> 5,500 5,500
<INVENTORY> 477,907 271,338
<CURRENT-ASSETS> 652,862 1,018,499
<PP&E> 178,466 83,575
<DEPRECIATION> 84,649 83,575
<TOTAL-ASSETS> 1,240,228 1,550,754
<CURRENT-LIABILITIES> 317,115 865,369
<BONDS> 0 0
0 0
6,100 0
<COMMON> 1,000 0
<OTHER-SE> 916,013 685,385
<TOTAL-LIABILITY-AND-EQUITY> 1,240,228 1,550,754
<SALES> 1,240,399 1,425,582
<TOTAL-REVENUES> 1,427,574 1,656,316
<CGS> 480,636 716,146
<TOTAL-COSTS> 1,090,394 1,320,963
<OTHER-EXPENSES> 398,952 450,876
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (61,772) (115,523)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (61,772) (115,523)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (61,772) (115,523)
<EPS-PRIMARY> (.06) (.12)
<EPS-DILUTED> (.06) (1.12)
</TABLE>
